Hi. I am having trouble understanding this circuit.

So after you connect the circuit to 12 volts and touch the probe to a positive voltage, current flows through D2, and the red LED (D2) lights up. The green LED (D1) lights up when touching ground. My question is, what is the purpose of D3?

 

Welcome to AAC

D3 protects D1/D2 in the case of the supply being reversed. Most LEDs don't like reverse voltages > 5v or so.

Technically, both LEDs are on when the probe is floating. Probe to ground makes red LED go off and green LED brighter, probe to +12 makes green LED go off and red LED brighter..

 

This circuit is not safe to use for all situations.
12 V can damage low voltage devices.

Also this voltage detector only works with low resistance loads.
If you want to detect logic levels you should use a circuit with high input resistance.

 

In addition to protecting both diodes against excessive reverse voltage, as mentioned in post#2, D3 ALSO assures that the tester will not operate if it is connected in reverse. That would be a carry-over from the version that used two 12 volt bulbs.