What is an Island Reversal Pattern?

Understanding Island Reversal Pattern

Island reversal is a rare but powerful chart pattern that signals strong potential trend reversals. The pattern forms when price gaps in one direction, trades within a range for one or more periods creating an "island", then gaps in the opposite direction, leaving the island completely isolated from surrounding price action by gaps on both sides. This dramatic formation represents a complete shift in market sentiment and often precedes significant directional moves.

Formation and Types

Bullish island reversals form at market bottoms after downtrends. Price gaps down creating the island, consolidates briefly, then gaps up isolating the island. Bearish island reversals occur at market tops after uptrends, with an upward gap followed by consolidation and a downward gap. The island can consist of a single candle or multiple candles spanning days or weeks. Exhaustion gaps typically form both boundaries, signaling trend exhaustion and reversal rather than continuation.

Trading Strategies and Significance

Island reversals carry strong implications due to their rarity and dramatic nature. The pattern suggests trapped traders on the island who will likely exit aggressively, fueling the new trend direction. Enter positions after the second gap confirms the island, setting stops beyond the island range. Measure targets using prior swing points or the preceding trend's length. The pattern's reliability increases with island duration and gap size. Combine with volume analysis and RSI divergence for confirmation.