What Is The Island Reversal Pattern & How To Trade With It

Island Reversal Pattern

The Island pattern indicates a possible reversal of a current trend. The pattern appears with the gaps on either side, resembling a separated area. That’s why it was called the Island.

What is the Island Reversal pattern?

The Island pattern, because of its structure, can be identified easily on the chart. The pattern contains gaps on both sides. These gaps suggest that price continued in a trend for a while, but now it’s showing signs of reversal.

Some traders say that the gaps which led to the formation of the Island pattern will eventually be filled as the price retraces to its previous position. However, the Island suggests that these gaps will not be filled for some time.

To identify the Island pattern, a trader must remember these points:

  • The Island forms after a long trend.
  • There is an initial gap.
  • There is a mix of candles.
  • The volume increases near the Island and the initial gap.
  • The final gap confirms the appearance of the pattern.

This is how the Island looks like:

Island pattern on a chart
Island pattern on a chart

One thing to note is if the size of the second gap is bigger than the first gap, then the Island pattern could be considered more reliable to some.

How to use the Island Reversal pattern?

As the Island is a reversal pattern, it indicates both bearish and bullish variations.

a. Bullish Island

In the bullish version, the Island emerges in a downtrend. The first gap has a negative value, followed by a cluster of candles, and the second gap has a positive value.

After the first gap, the market either continues to move downward or starts consolidating. The second gap forms close to the price level of the first gap. Traders can enter the market before the second gap or at it with a stop-loss set near the entry position.

Bullish Island Pattern
Bullish Island Pattern

 

b. Bearish Island

In its bearish variation, the Island surfaces in an uptrend. There is a strong positive gap, followed by a group of candles, and then the second gap with a negative value.

Bearish Island Pattern
Bearish Island Pattern

 

The market either continues in an uptrend or starts reversing. The second gap is near the price level of the first gap. Traders can take short positions before the second gap or at it with a tighter stop-loss.

The Island pattern can sometimes work more effectively when there is a strong volume, the second gap bigger than the first gap, and the size of the Island shouldn’t be too large.

With an increasing volume, there may be a strong chance of a trend reversal. When the second gap is bigger than the first gap, the reversal could also be considered more valid. The size of the Island means period. Generally, when the period is too long, the Island pattern is prone to false signals. So, the period shouldn’t be more than three months according to some traders.

Island Reversal pattern trading strategy

The Island pattern can be used for both short-term and long-term trading. However, I find that the Island pattern produces less false signals on the weekly and monthly charts.

Island Reversal pattern buy strategy

  • Locate the pattern in a downtrend.
  • Wait for the price bar to go bullish before entering.
  • Enter at the second gap or before it.
  • Place a stop-loss near the recent low from the entry point.
  • Exit the trade when the price drops.

Island Reversal pattern sell strategy

  • Look for the pattern in an uptrend.
  • Wait for the price bar to go bearish before entering.
  • Enter at the second gap or before it.
  • Place a stop-loss near the recent high from the entry point.
  • Exit the trade when the price rises.

Island Reversal pattern conclusion

The Island pattern is often used as an identifier of a trend reversal. Traders can consider volume, gaps, and the pattern’s size before taking trades with the Island pattern.

I would prefer to use the majority of candlestick patterns such as the Island Reversal Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.

The Island Reversal Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Island Reversal Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Island Reversal Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!