Island Reversals pricing model

Reversal Island (Reversing Island) is a price model with a pretty pictorial name. This is one of the reversal patterns in the market that can appear in both the uptrend and the downtrend. Island Reversal is quite rare in the forex market, but you cannot be passive when you see models like this appear on the chart. In the article below, we will help you understand the characteristics as well as effective trading strategies with the Island Reversal model.

What is Island Reversal?

Island Reversal is a pattern of one or more candles that are separated and separated from the rest of the chart by gaps. This is a reversal pattern that can occur in both up and down trends. If it occurs when the price increases, the pattern shows a reversal signal to decrease. If it occurs when the price falls, the pattern shows a reversal to increase.

Island Reversal requires gaps so it's more likely to be encountered on large time frame charts such as days and weeks than small time frames on the forex market.

Features of Island Reversal

As mentioned, Island Reversal can appear at the top of an uptrend, commonly known as Island Top but may also appear at the bottom of a downtrend, commonly known as Island Bottom. Thus, to determine the exact Island Reversal model has been created or not, we rely on the following characteristics:

(1) The pattern appears after a clear trend, either up or down.

(2) The chart first appears a blank

(3) After creating a gap, the price continues to move in the trend and create one or more candle assemblies within a certain range.

(4) Volume increases and the price trend starts to weaken.

(5) The chart appears to have a gap and the price moves against the original trend.

The 5 components we have listed above are illustrated in the image below.

You should note that Island Reversal is a reversal pattern, but the level of efficiency is quite poor. Therefore, we should carefully look for some additional factors to increase the strength of the reversal signal, including:

A pattern with a long shadow is better than a short shadow.

Narrow and tall model will give better performance.

Actual example of Island Reversal model

To help you better visualize the Island Reversal model, we give two examples below.

The first is the image of Island Reversal appearing in the uptrend. As you can see, after a rally, the chart creates a Bullish gap, followed by a cluster of 3 candles in a range that looks like an offshore island. The pattern ends by creating a bearish gap (Bearish gap) and going down.

Next is the Island Reversal example that appears at the bottom. Same as above but this time the chart started with a downtrend, a gap appeared and created a cluster of 6 candles moving in a narrow range. The pattern ends when the gap rises and the price reverses later.

Guide to trading with the Reversal Island model

Entry point command

First, you need to make sure that the gaps in the pattern are clear, the ends of the candles should not overlap.

Secondly you need to determine the type of Island Reversal model. If the pattern appears at the top, we look for opportunities to sell down. If the pattern appears at the bottom, we look for buying opportunities.

In terms of entry points, as soon as the pattern creates a second gap, you can place buy or sell orders depending on the model at market prices.

How to set a stop loss (Stop loss)

As mentioned above, Island Reversal is a model that is not highly appreciated for performance, so placing a stop loss when trading is extremely necessary to protect your account from too much fluctuations. In this case, the stop should be placed above the top of the candles if it is Island Top and below the candlesticks of the model if it is Island Bottom.

How to take profit (Take profit)

Take the case of Island Reversal model appearing at the bottom as an example. To determine profit taking, we measure the distance from the beginning of the first gap to the bottom of the lowest candle in the pattern. Taking this distance plus the end of the second gap will give you a minimum profit. Of course this is only a minimum profit-taking point so when entering this area, you can exit the order to profit or continue to widen the profit-taking distance to the above support / resistance levels.

summary

Island Reversal is a reversal price pattern characterized by 2 gaps and a candle cluster separated from the rest. The signal for the signal is quite weak so you should apply it carefully and set your full take / stop loss. Good luck!

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Author: Tin Nguyen

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