LuxAlgo

Reversal Signals [LuxAlgo]

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The Reversal Signals indicator is a technical analysis tool that aims to identify when a trend is fading and potentially starting to reverse.

As a counter-trend tool, the Reversal Signals indicator aims to solve the problem of several technical analysis indicators that perform well during trending markets but struggle in ranging markets. By understanding the key concepts and applications of the tool, traders can enhance their market timing and improve their trading strategies.

Note: It's important to explore the settings of the indicator to customize to your own usage & display as there are various options available as covered below.

🔶 USAGE


The Reversal Signals indicator is comprised of two main phases: Momentum Phase and Trend Exhaustion Phase. These phases help identify potential trend reversals in bullish, bearish, and ranging markets.

🔹The Momentum Phase

The momentum phase consists of a 9-candle count and in rare cases 8-candle count. In a bullish trend, a starting number ‘1’ is plotted if a candle closes higher than the close of a candle four periods ago. In a bearish trend, a starting number ‘1’ is plotted if a candle closes lower than the close of a candle four periods ago.

The following numbers are plotted when each successive candle satisfies the four-period rule. The potential reversal point comes when the Reversal Signals plot a label on top of a candle in a bullish trend or at the bottom of a candle in a bearish trend. The momentum phase is immediately canceled if, at any point, a candle fails to satisfy the four-period rule.

Based on the extremes of the momentum phase, the Reversal Signals generate support & resistance levels as well as risk/stop levels.


🔹 The Trend Exhaustion Phase

The trend exhaustion phase starts after completing the momentum phase and consists of a 13-candle count. In a bullish trend exhaustion phase, each candle’s close is compared to the close of two candles earlier, and the close must be greater than the close two periods earlier. In a bearish trend exhaustion phase, each candle’s close is compared to the close of two candles earlier, and the close must be lower than the close two periods earlier.

The trend exhaustion phase does not require a consecutive sequence of candles; if the order of candles is interrupted, the trend exhaustion phase is not canceled. The trend exhaustion phase generates stronger trading signals than the momentum phase, with the potential for longer-lasting price reversals.


🔹 Trading Signals

The Reversal Signals script presents an overall setup and some phase-specific trade setup options, where probable trades might be considered. All phase-specific trade setups, presented as options, are triggered once the selected phase is completed and followed by a price flip in the direction of the trade setup.

Please note that those setups are presented for educational purposes only and do not constitutes professional and/or financial advice

- Momentum: Enter a trade at momentum phase completion, and search for buy (sell) when the bullish (bearish) momentum phase pattern is complete. Ideally, the momentum phase completion should close near its support/resistance line but shall not be above them, which indicates continuation of the trend
- Exhaustion: Enter a trade on trend exhaustion phase completion, and search for buy (sell) when the bullish (bearish) trend exhaustion phase is complete
- Qualified: Buy (sell) when a bullish (bearish) trend exhaustion phase combined with another bullish (bearish) momentum phase sequence is complete

Long trade setups are presented with "L" label and short trade setups with "S" label, where the content of the label displays details related to the probable trade opportunity

Once a phase-specific trade setup is triggered then the Reversal Signals script keeps checking the status of the price action relative to the phase-specific trade setups and in case something goes wrong presents a caution label. Pay attention to the content of the caution labels as well as where they appear. A trade signal, followed immediately by a warning indication can be assumed as a continuation of the underlying trend and can be traded in the opposite direction of the suggested signal


It is strongly advised to confirm trading setups in conjunction with other forms of technical and fundamental analysis, including technical indicators, chart/candlestick pattern analysis, etc.

🔶 DETAILS

The Reversal Signals script performs the detection of the phases by counting the candlestick meeting the specific conditions, which includes:

- Detection of the 8th and 9th candle perfection during the momentum phase
- In some cases, the 8th count will be assumed as momentum phase completion
- Trend exhaustion phase counting stops in case any type of momentum phase completion is detected during the counting process
- Postponing the last count of the trend exhaustion phase, the 13th candle must be below/above the 8th candle and if not the candles will be indicated with '+' sign under them and the script continues to search for a 13th candle at the next ones until the conditions are met

🔶 ALERTS

When an alert is configured, the user will have the ability to be notified in case;
  • Momentum / Trend Exhaustion phase completion
  • Support & Resistance level cross detection
  • Stop / Risk level cross detection
  • Long / Short Trade Setups are triggered

Please note, alerts are available with 'any alert() function call' and the alerts will be received only for the features that are enabled during alert configuration

🔶 SETTINGS

🔹 Momentum Phase

  • Display Phases: displays the momentum phases, where the Completed option allows the display of only completed momentum phases. The detailed option allows the display of the entire process of the momentum phase processes
  • Support & Resistance Levels: Toggles the visibility of the Support & Resistance Levels and Line Styling options
  • Momentum Phase Risk Levels: Toggles the visibility of the momentum phase Stop/Risk Levels and Line Styling options

For color options please refer to the options available under the style tab

🔹 Trend Exhaustion Phase

  • Display Phases: displays the trend exhaustion phases, where the Completed option allows the display of only completed trend exhaustion phases. The detailed option allows the display of the entire process of the trend exhaustion phase processes
  • Trend Exhaustion Phase Risk Levels: Toggles the visibility of the trend exhaustion phase Stop/Risk Levels
  • Trend Exhaustion Phase Target Levels: Toggles the visibility of the trend exhaustion phase Target Levels

For color options please refer to the options available under the style tab

🔹 Trade Setups

  • Overall Trend Direction & Trade Setup: displays the overall trend and probable trade setup levels, the users should search for a price flip and confirm with other means of technical and fundamental analysis for the trade setups once the label is plotted
  • Phase-Specific Trade Setup Options
  • Momentum: Searches for a trade setup after momentum phase completion
  • Exhaustion: Searches for a trade setup after trend exhaustion phase completion, stronger trend reversal possibility compared to momentum phase setup
  • Qualified: Searches for a trade setup after the trend exhaustion phase followed by a momentum phase completion
  • None: No trade setups are presented
  • Price Flips against the Phase Specific Trade Setups: enables checking the price action relative to the phase-specific trade setups

🔶 RELATED SCRIPTS

Here are the scripts that may add additional insight during potential trading decisions.

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