3 Bar Reversal

3 Bar Reversal

This pattern is described in John Carter's "Mastering the Trade"

The 3 Bar Reversal indicator is a simple but effective price action tool designed to highlight potential short-term reversals in market direction. It monitors consecutive bar behavior and identifies turning points based on a three-bar pattern. This tool can assist traders in spotting trend exhaustion or early signs of a reversal, particularly in scalping or short-term trading strategies.

How It Works
This indicator analyzes the relationship between consecutive bar closes:

It counts how many bars have passed since the price closed higher than the previous close (barssince(close >= close[1])) — referred to as an "up streak".

It also counts how many bars have passed since the price closed lower than the previous close (barssince(close <= close[1])) — known as a "down streak".

A reversal condition is met when:

There have been exactly 3 bars in a row moving in one direction (up or down), and
The 4th bar closes in the opposite direction.

When this condition is detected, the script performs two actions:

Plots a triangle on the chart to signal the potential reversal:
A green triangle below the bar for a possible long (buy) opportunity.
A red triangle above the bar for a possible short (sell) opportunity.

Triggers an alert condition so users can set notifications for when a reversal is detected.

Interpretation
Long Signal: The market has printed 3 consecutive lower closes, followed by a higher close — suggesting bullish momentum may be emerging.

Short Signal: The market has printed 3 consecutive higher closes, followed by a lower close — indicating possible bearish momentum.

These patterns are common in market retracements and can act as confirmation signals when used with other indicators such as RSI, MACD, support/resistance, or volume analysis.

Usage Examples
Scalping: Use the reversal signal to quickly enter short-term trades after a short-term exhaustion move.

Swing Trading: Combine this with trend indicators (e.g., moving averages) to time pullbacks within larger trends.

Confirmation Tool: Use this indicator alongside candlestick patterns or support/resistance zones to validate entry or exit points.

Alert Setup: Enable alerts based on the built-in alertcondition to receive instant notifications for potential trade setups.

Limitations
The 3-bar reversal logic does not guarantee a trend change; it signals potential reversals, which may need confirmation.

Best used in conjunction with broader context such as trend direction, market structure, or other technical indicators.