How to detect PIERCING LINE & DARK CLOUD candlestick patterns • Pine Script [OUTDATED V4] Tutorial

How to detect PIERCING LINE & DARK CLOUD candlestick patterns • Pine Script [OUTDATED V4] Tutorial

hi traders welcome back to another
lesson this lesson is going to cover
another candlestick pattern so this was
a question i received from
lucas so lucas is trying to detect this
candlestick pattern here
so this is a bearish example this is
called a dark cloud cover candle
so what he's looking for is i'm guessing
this is an rsi he's looking for the rsi
to go overbought and then for this
candlestick pattern to
print onto his chart so the way we
identify this candlestick pattern
is the open price of the bearish candle
is above the bullish candles
closed price so you can see that here
and then
this red candle this bearish candle
closes within
the candle body of the bullish candle
preceding it
so this would have closed as a bullet
bearish engulfing candle that wouldn't
count
and if it were to close higher than the
previous candles
closing price then that would make this
candle a gap candle
and that is not what we want either so
we're looking for a candle
that opens higher than the previous
bullish candle and then closes back
within
that previous candles range and then
obviously for our bullish example
this is called a bullish piercing line
and we just do pretty much the opposite
so we're looking for a bullish candle
that opens lower than the previous
bearish candles close and then this
bullish candle must close
within the previous bearish candles body
and
all of this must happen while the rsi is
oversold so this is very similar to some
of the other candlestick patterns that
i've shown
in the course the main difference is
that we're trying to detect a closing
price within
the previous candles range which means
we need to do things a little bit
differently
so let's hop over to the pine script
editor and get our hands dirty with some
code
so here i am with a blank script nothing
has been changed except these comments
in the
study title all i've got on my chart is
the rsi indicator because we're going to
be using that as a filter or a condition
so we want to detect
these bearish dark cloud cover candles
and bullish piercing
line candles whenever the rsi is
overbought or oversold
so let's get into it let's open up the
source code here
and start typing so as always the first
thing i like to do is get user input
assuming i know what user input i need
and for this particular script i do know
i need an rsi length
and an rsi overbought and oversold
threshold
so get user input the first one is an
rsi length
using the input function we'll give it a
title of rsi
length a type of
input.integer so it's a whole number the
default value is going to be
7 for this example normally you would
probably make this 14
that would be a standard rsi length but
for demonstration purposes
in this lesson i want to detect more
signals
than a 14 length period rs i normally
would
so you can set this to whatever you want
that's the point of making user input
but today we're just going to leave it
as seven next thing we need is an rsi
overbought and rsi oversold threshold so
input title rsi overbought
the type of this is going to be
input.float the reason i like to do that
is because the rsi value
is actually a float floating point value
it's not an integer
and so by making the rsi overboard and
oversold
threshold values afloat that gives the
user a lot more control
over what their overbought and oversold
level is for example you could set it to
23.62 instead of just 23
and you get the idea so this one is
going to be a default
value of 70.0 just a standard rsi
overbought level there i'm going to copy
this line of code flip this to os and
this
230. so now we have our rsi values let's
move on
to detecting our candlestick patterns
but before we do that we should probably
get the current rsi value
so that's easy we just declare a new
variable called in this case rsi
we use the inbuilt rsi function you need
to pass it a price source to calculate
the rsi on
by default you would use a closing price
and we pass our rsi length
parameter into this function that will
give us the current rsi
for the current candle and we can use
that later on to
check our filter to make sure that rsi
conditions are met
so the first candlestick pattern i want
to detect here
is the bullish piercing line
so i'm going to declare this variable as
just bpc
and what we need to do now is we need to
check did the current candle open
lower than the previous candles close so
let's
open this up a bit this kennel stick
pattern here is not
actually a bullish piercing line because
this candle
if you look really closely closed higher
than the previous candles open
but this candle here is a bullish
piercing line
so we'll focus on this one while we're
coding so what we're looking for
is did the current candle open
lower than the previous candles close
and
did the current candles closing price
close higher
than the previous candles close so this
is our
current candles closing price did it
close higher than the candles
previous candles close and did the
current candles closing price
close lower than the previous candles
open
sorry i'm making a lot of typos today
because i've got a giant microphone in
front of my face while i'm trying to
type
but this uh what we have here will
detect a bullish piercing line
because the current candles close is
within
the previous candles open and the
previous candles close
and the current candle opened lower
than the previous candles closed the
last thing we should probably do
with this candlestick pattern check is
just confirm that the previous candle
was indeed
bearish so let's add on one last
condition here
we want to check did the previous candle
close
lower than the previous candles open so
just to confirm that we are indeed
detecting this candlestick pattern let's
quickly add in a plot shape function
to draw these signals to the chart so
i'm going to use the inbuilt plot shape
function
we're going to check our bpc condition
if that's true it'll draw a shape if
it's false it will draw nothing
we're going to give it a style of style
shape.triangle
up since it's a long signal
set the location to location.below bar
we'll set the color to color.green
and we'll give it some text too we'll
just write long underneath this shape
and we'll also title it so that we can
modify this all these style settings
in the settings menu so now we can get
rid of our plot close because
every script needs at least one plot
call needs to draw something to the
chart
or output something uh but we're doing
that now with our plot shape function so
we get rid of that
now if i save the script we are
detecting our bullish
piercing line candles and just before i
continue i should set overlay to true
here
i forgot to do that at the start of the
script i'm not sure why it just
automatically drew onto the chart but
anyway if you're following along and
your script is not doing this just make
sure you've said overlay to true
and there we have it we are detecting
bullish piercing line candles
so before we start checking our rsi
conditions let's do the same
for the bearish dark cloud cover candle
so here i'm going to write a new comment
detect bearish dark cloud
cover and i'm going to call this
variable dc
c short for dark cloud cover and we
basically have to do
everything we did here but in reverse
like we're flipping these operators
around
and our price sources as well so what we
need to do here to check
for a bearish uh dark cloud cover which
is this candlestick pattern right here
this red candle here meets our
conditions for a bearish dark cloud
cover
so as i'm writing this code out just use
this
candlestick right here as your reference
so what we need to do is we need to
check did the current candle
open greater than the previous candles
closing price
so that's the first condition met and
did the current candles closing price
close
greater than the previous candles
opening price
that condition is also met and did the
current
candles closing price close lower
than the previous candles closing price
because the previous candles closing
price is a bullish candle
we need to change our price source from
an open to a close
and that condition is also met the
closing price of our red candle
is less than the previous candles
closing price
but greater than the previous candles
opening price and it opened higher than
the previous candles closing price
so that's our bearish dark cloud cover
candlestick right there the last thing i
like to do just to make sure that we are
definitely
only detecting the candlestick patterns
we want is i'm going to check
did the previous candle close bullish or
in other words
did the previous candles closing price
close greater than its opening
price that's a green candle and that's
the candlestick pattern we want to find
so now i can copy this plot shape
function paste it in there change this
to dark cloud cover
change the triangle to triangle down
since this is a short we're selling this
market
change the location to above bar and the
color to red
and obviously our text too short
and there we go now if i save the script
we should be detecting this candlestick
pattern
yep as well as our bullish piercing
lines
so far so good the final thing we need
to do here
is check our rsi conditions because we
don't want to be detecting these
candlestick patterns in the middle
of a rally in regards to the bearish
dark cloud cover
and we don't want to detect these
candlestick patterns in the middle of a
sell-off
in the case of bullish piercing alliance
we want to detect these candlestick
patterns
when price is at an extreme since this
is a reversal
candlestick pattern so let's open up the
editor again
and what i'm going to do here to keep
things
sort of clean and simple so that we can
keep our code in sections i feel like
this will just make it easy to
understand what we're doing
we're going to split our candlestick
patterns
from our long and short signals so i'll
show you what i mean
i'm going to create a new couple of
variables here and this
comment is going to say determine if the
current bar
meets our conditions so we're already
detecting our candlestick patterns now
we need to combine our
candlestick patterns with our market
conditions in this case the rsi
at an extreme so the first one i'm going
to detect is a long signal
and what we need to happen for in order
for a long signal to be considered valid
is we need to check if the rsi value is
less than or
equal to our rsi oversold threshold so
in this case
30 if the rsi is less than or equal to
30
and we have detected a bullish piercing
line candlestick pattern
then our long signal will be set to true
and paste that over to our plot shape
function
and now if i save the script this long
candlestick pattern here will go away
since the rsi is not oversold
on that bar so let's save the script and
there we go
but before i continue i should really
change this to
the previous candle being oversold so
put a historical operator here
square brackets and then a one that will
check if the previous
candles bar was oversold
before our bullish piercing line
occurred now the reason you want to do
that with this candlestick pattern
and most overbought and oversold
patterns
is that sometimes like this for example
if we check if the
current bar's rsi value was overbought
that condition would fail because this
bearish candle has closed back
below our over bought threshold
so we want to check the previous bar's
rsi value not the current bar
for our candlestick pattern this is true
of bullish engulfing and bearish
engulfing candlestick patterns too when
using the rsi
and even hammer candles so any reversal
candlestick pattern
often will take the rsi from overbought
back below our overbought threshold or
oversold threshold
so keep that in mind when using these
sort of
indicator values as your conditions and
you'd want to do the same thing if
you're using a stochastic or any other
oscillator
so that's our long signal let's detect
our short signals and we're going to do
exactly the same thing here but flip our
operator around
was the previous bars rsi greater than
or equal to our rsi
overbought threshold and do we have a
dark cloud cover candle
let's paste that into our plot shape
function here
save the script and this signal will go
away
that signal will go away and all we're
left with is our candlestick pattern
at an extreme price rally and
we are detecting pretty pretty decent
reversal
candlestick patterns obviously this one
here would have been a losing trade
but that's why we created user settings
so the user
can adjust these rsi values
and maybe that will increase the
accuracy
of these candlestick patterns depending
on how the user
wants to trade this and of course this
is not an invitation to trade this
indicator i have no idea if this is
profitable or not you'd have to go and
back test it this is obviously just for
examples and demonstration purposes
if it were me trading a strategy like
this i would be combining
this sort of price action pattern with
more conditions than just an rsi a
perfect example of this would be support
and resistance
so look for a previous support or
consolidation level
wait for price to come up into
that level wait for the rsi to go
overbought and then wait for our
candlestick pattern
to use this candlestick pattern for
trend continuation
a candlestick pattern like this i
haven't back tested it but i would
imagine it would be
more effective as a trend continuation
pattern rather than
a mean reversion or counter trend
pattern that's just how i would
personally trade it
but anyway that's pretty much it for
this script
this will detect bullish piercing lion
kennels
and bearish dark cloud cover candles
when our rsi conditions are met
so that's mission accomplished right
there but i want to show you one last
little detail that i was playing around
with when i was trying to write this
script
sometimes these candlestick patterns
don't quite look right for example
here's a good example
this candlestick pattern technically
meets our conditions
it opened higher than the previous bars
close and it closed back within the
previous bar's body
but it's clearly not ideal what you
really want to see with this candlestick
pattern
is a noticeable gap between the previous
candles closing price and the
candlestick pattern itself
so the best way i could think of to do
this was to add in a
pip margin check so we want a minimum
distance between the previous candles
closing price
and our entry candles opening price so
let me show you how i achieved that
now this is all optional what i'm about
to show you now is slightly more
advanced
but i figure while we're here we might
as well so what i want to do here is add
one more user variable called
margin
and i'm going to call this pip margin
i'm going to give it a type of input dot
float
and i'm going to set the default value
to 0.0 so by default this is
disabled this condition will be ignored
but if the user wants to
turn this on they can come up into the
settings menu and increase this number
and i'll show you what this number will
do in a second so after we've detected
our candlestick patterns
we then want to check
the pip distance between the candle
bodies
so that's easy enough to do all we're
going to do here is i'll
create two new variables the first one
will be bpc
margin and that's going to be set to
this expression here we're going to get
the previous candles closing price
so this is for bullish candles so we're
looking for bullish candles here so
we're getting the previous candles
closing price
so we're minusing or subtracting that
closing price
from the current candles opening price
and that will give us the distance
in pips between our two candles
we're going to do the same for our
bearish candles our dark cloud cover
except this time we're going to get the
current candles
opening price and subtract it from the
previous candles closing price
and that will give us the distance from
our
entry candlestick pattern to the
previous candlestick pattern
once we have those two values the last
thing we need to do
is just check in our long signal this is
why i like to separate our candlestick
patterns from our
actual market conditions just makes the
code a little bit easier to read
especially much later on if you come
back to the script after a few months of
not working on it it's just much easier
to see at a glance what you're doing
with your code
when you separate all these conditions
you could of course combine all of these
conditions into one variable
and we could just check on this bpc if
the rsi is overbought and oversold and
if our margin
requirement is met but i find that it's
bet it's a better practice to expand
your code this way
there's no penalties for it you know
pine script allows you to do this so you
might as well take advantage of it to
keep your code tidy
so the final thing we need to do here is
check is our b
c margin a bullish piercing candle is
the
margin the pip distance between those
two candles
greater than or equal to our margin
input
up here then we need to do exactly the
same thing for our
dark cloud cover margin
is that also greater than or equal to
our margin
input variable now if i save the script
that won't change
anything we'll still be detecting all of
these candlestick patterns
but now we can come up into the settings
menu and
increase this pip margin in this case a
pip would be 0.1
price units so let's just set it to that
to begin with
click ok and that hasn't changed much at
all
but this is the candlestick pattern that
we don't really want to detect so let's
use this as our example
zoom in a little bit and so the distance
between this is about 0.2 so let's set
this to 0.3
there we go now that candlestick pattern
has gone away
and so have our other ones so let's try
0.2
there we go that's a bit better so now
this
um i can't even see it anymore where was
it
so that's why we don't want to detect
this candlestick pattern oh there it is
this one here
now that pattern has gone away but we
are still detecting
this pattern down here which is
beautiful because that was a pretty good
reversal signal and again remember you
wouldn't want to trade this just in the
middle of nowhere
the best thing to do would be to confirm
that this is at some sort of structure
level
so if you zoom out the chart yeah we
definitely are
look at this major swing low
price had a major rally from there on
this time frame at least
and then when it got back down here our
conditions were met
our rsi was oversold we had our bullish
piercing line and we had a very nice
rally out of here so this is a great
signal this is what we want to detect
this in here
this i'd probably trade as well since we
were at a previous
swing low so obviously these candlestick
patterns
you'll never find one that is 100
accurate and never loses trades
the whole idea is to find good setups
that offer
a really nice risk reward profile
so with an average reward of around
three to one
you can calculate your minimum win rate
here if you're risking one percent per
trade
then you want to divide one by one
plus your risk reward that equals 0.25
so with an average risk reward of 3 to 1
you only need to win
25 of your trades
in order to break even if you win any
higher than that
then you're starting to make money so
this isn't a trading course i'm not
teaching you guys how to trade
hopefully you already know most of the
basics are regarding trading if you're
learning pine script i would imagine
most of you
would be experienced traders by now if
you're looking into this language and if
not that's even better because
learning this stuff will definitely
improve your trading
understanding price action on an
intimate level a very detailed level so
that you can actually
code scripts to detect these candlestick
patterns that will really help you with
your analysis
in your trading especially if you're an
objective rules-based trader
which a lot of traders are and for good
reason makes it a lot easier to develop
strategies that are easy to execute
consistently but anyway that's it for
this lesson let's just
quickly jump back over to apple and
we'll play around with this
this new filter we made and set it back
to 0.1
and that's actually too high on this
market because if you look at this here
our pip is uh two decimal places so
0.03 so let's set this to 0.01
and there we are we're now detecting our
candlestick patterns
if we set it back to zero let's see if
there's any patterns that don't look
right
this is one here i mean this technically
meets our conditions but maybe you
don't want to detect that so let's try
setting this to 0.02
that goes away but how more accurate
candlestick patterns
are still being detected perfect and
that is a successful pip margin filter
added to the script
and that brings me to the end of this
lesson this was a little bit longer than
i
expected it to be but i hope you found
this interesting
i hope that this inspired some ideas for
you to go out and pursue
maybe you want to combine this with
other market conditions you could try
using a stochastic instead of an rsi or
you could throw in an ema
you could check to make sure that the
entry candle
is the lowest candle over the past x
amount of bars
there's all sorts of filters you could
add to improve the accuracy of this
script and one very important thing i
forgot to mention about this candlestick
pattern is that a lot of traders
define it as a bullish candle in the
case of a bullish piercing candle
closing above the 50 mark of the
previous candle
or for a bearish candle closing below
the previous
50 mark so just before i wrap this
lesson up i should probably really
quickly show you how to add
that filter to the script so this is
actually really
simple to do i'll just quickly add in a
new section of code here below our
pip margin filter i'm going to say here
piercing line filter and now what we
need to do before we can determine
whether or not the current bar closes
beyond the previous
bars 50 mark is we need to calculate the
50
mark so i'm going to create a new
variable here called piercing line
that's going to be set to the previous
low
minus the previous high multiplied by
0.5 or 50 percent and then we need to
add
the previous high back on onto this
result this value and that will give us
the 50 percent price
of the previous candle so if we're
looking at this candle for example
it will calculate what the 50
mark in terms of price is for that
candle
and this is from the high to the low
so now that we have that value it's very
easy to check now if the current candle
closes beyond that value so for our long
pierce
filter i'm just going to call this long
pierce and it's going to be set to
is the closing price greater than or
equal to the piercing line
and for short pierce it's going to be
the opposite
does the current bar close less than or
equal to
the piercing line and then finally all
we need to do is add
this filter onto the end of our long and
short signal checks so i'll just copy
and paste those over
and now if i save the script we will
only be detecting
bullish piercing line candles or bearish
dark
cloud candles that close below
the 50 mark of the preceding candle
so quite a simple filter there but i'm
sure it will dramatically increase
accuracy of this pattern since it is
intended to be used as a reversal
pattern
so you want the momentum to be confirmed
by a strong close on that reversal
candle
but that's it for today good luck with
your trading
and i will see you in the next lesson so
that's it for this lesson
i hope you found that interesting and
helpful and if you did and you want to
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you