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:
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.
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.
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
An island reversal is a chart structure with a gap on both sides of the candle. Island reversals are prevalent once a progressive motion has hit its peak. The candlestick appears to be alone, as if it were on a desolate island, hence the name “island reversal.” A significant increase in volume on both the first and subsequent gaps is a key indicator of a true island reversal. The emergence of an island reversal is commonly attributed to news-driven occurrences in pre-market or after-hours trading.
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.
Forex traders view island reversals as a way to buy or sell in anticipation of price moving in the opposite direction. In this way, the island reversal pattern may be considered a bullish or bearish indicator.
Island Reversal pattern buy strategy
The bullish island reversal pattern develops within a pronounced downtrend. It consists of a negative gap between price action and an island of candlesticks. The bullish island is a signal to buy in anticipation of an upwards shift in price action.
- 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
The bearish island reversal pattern forms amid a prevailing uptrend in price. It comprises a positive gap between price action and an island of candlesticks. The bearish island is a signal to sell the market in the hopes of cashing in on a bullish trend reversal.
- 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 reversal pattern is a candlestick pattern in stock trading that helps traders to predict future price direction. 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.
The pattern is usually formed after a quick reaction or rally and is separated from the previous move by an exhaustion gap, and from the move in the opposite direction that follows a breakaway gap. The island pattern can be identified easily on a chart because of its structure. It has gaps on both sides. The gaps imply that price continued in a trend for a short period, but it’s now showing signs of a reversal.
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