An island reversal is a candlestick pattern that can help to provide an indication of a reversal.
Island reversals are a powerful identifier because they are formed over a series of days and can therefore be more reliable in indicating a trend reversal. The series of candlesticks formed within two candlestick gap distinguishers is what makes the pattern unique and dawns the name island.
Island reversals can be either bullish or bearish. Both help a chartist to identify potential profit opportunities.
The island series in the formation is a predecessor for the profit opportunity. Thus, the final gap component provides the essential indicator.
Bullish Island Reversal
A bullish island reversal will be charted over a series of days showing a short downtrend. A bullish island reversal begins with a gap down followed by a series of down trending candlesticks. This trend gives investors the opportunity to identify the pattern over a series of time and watch for the final component, the gap up. The gap up is a strong indicator that a bullish reversal is to follow.
Bearish Island Reversal
A bearish island reversal is the opposite of a bullish island reversal. In this scenario, the indicating island begins with a gap up followed by a series of uptrending candlesticks. The final indicator is then a gap down, which is expected to be followed by a bearish trend.
Island reversals may have islands that span over varying timeframes. Thus it is essential to watch for the gaps. Gap patterns occur when a significant difference in price is shown from one day to the next. Gaps ups will be formed from two white candlesticks with the second showing an opening price higher than the previous day’s closing price. Gaps down occur from two red candlesticks with the second showing an opening price lower than the previous day’s closing price.
Island reversals, like all reversal patterns, will typically be supported by subsequently drawn breakaway gaps. A breakaway gap is usually the first sign of a new trend which will then include several runaway gaps followed by an exhaustion gap.
Traders have several ways to profit from a reversal. One of the most successful strategies for testing a reversal indicator is a grid strategy. Grid strategies deploy automated buy and sell orders that are usually programmed to occur in pip intervals. This allows traders to benefit from either a bullish or bearish strategy while factoring in some risk management.
Traditional strategies can also be deployed with options as well as buy and sell orders. Buy orders and call options are typically used on a bullish uptrend. Sell orders and put options are also profitable on a downtrend.