Island Reversal Pattern trading strategy
The Island pattern suggests a reversal of a current trend. The pattern has gaps on both sides, giving it the appearance of a divided region. That’s why it’s known as the Island.
What is the Island Reversal pattern?
The Island pattern can be seen on the chart because of its structure. Both sides of the pattern have gaps. These gaps indicate that the market has been following a trend for some time but is now displaying reversal signals.
Some traders believe that once the price retraces to its prior position, the gaps that lead to the development of the Island pattern can be filled. On the other hand, The Island claims that these gaps will not be addressed for some time.
How to identify the pattern?
To identify the Island pattern, you need to look for these conditions:
- – The Island pops up after a long trend.
- – There is an initial gap.
- – There is a mix of small and large candlesticks.
- – The volume increases near the Island.
- – The final gap confirms the occurrence of the pattern.
One thing to note is that if the second gap’s size is bigger than the first gap, then the Island pattern is considered more reliable.
How to apply the Island Reversal pattern strategy?
When there is a lot of volume, the second gap is wider than the first gap, and the size of the Island isn’t too big; the Island pattern works better.
There is a strong likelihood of a trend reversal with growing volume. The reverse is more valid when the second gap is larger than the first gap. The size of the Island determines the period. The Island pattern is prone to misleading signals when the time is too lengthy. As a result, the time frame should not exceed three months.
The Island is a reversal pattern, so it mentions both bearish and bullish trading strategies.
Bullish Island trading strategy
The Island appears in a downtrend in the bullish version. A cluster of candles follows the first gap with a negative value, while the second gap has a positive value.
Following the first gap, the market either continues to fall or begins to consolidate. The second gap emerges near the first gap’s price level. Traders can join the market before or after the second gap with a stop-loss near the entry position.
Bearish Island trading strategy
The Island appears in an upswing in its bearish version. There is a big positive gap, followed by a group of candles, and then a second negative gap.
The market either continues to rise or begins to fall. The second gap is close to the first gap’s pricing level. As a result, traders can enter short trades before the second gap or with a tighter stop-loss after the second gap.
Both short-term and long-term traders can benefit from the Island pattern. On the weekly and monthly charts, however, the Island provides fewer false signals.
Bottom line
The Island pattern strategy is great for spotting a trend reversal. However, before trading with the Island, you should think about volume, gaps, and the pattern’s strength.
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