Island Bar Chart Reversal

There are two main types of island reversals – the simplified island reversals and the cluster (or complex) island reversal. The first type is easy to identify, the second is typically a lot harder to identify because of movement between the first and second gap.

The island reversal is an extremely erratic and dangerous reversal that occurs from overnight market pressures and after market trading. It pushes price heavily in one direction causing a “gap” to appear in the market, holds for a period and then rebounds back heavily in the opposite direction creating a second gap. Its formation leaves those who opened positions before the first gap at deep risk of adverse trading outcomes unless adequate stops where put in place to protect trading profits.

In an uptrend, the Island reversal has the following traits:

• A gap between the previous periods high and the current periods low
• Followed by a gap between the low of the previous day and the high of the current day

In a downtrend, the Island reversal has the following traits:

• A gap between the previous periods high and the current periods low
• Followed by a gap between the low of the previous day and the high of the current day