What is the Island reversal candlestick pattern?
Hello all. We know that in the financial markets, predicting the
direction of prices is invaluable for making profitable trades. There are
various techniques used for this purpose, and one of these techniques is
Japanese candlestick analysis. Candlesticks are necessary tools in technical
analysis. In this article, we will examine the Island Reversal candlestick
pattern. The Island Reversal is considered a candlestick pattern in technical
analysis, often indicating the end or reversal of a trend. There are two types:
- Bearish Island Reversal candlestick pattern
- Bullish Island Reversal candlestick pattern
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| The Bullish & Bearish Island Reversal candlestick patterns. |
Island Reversal candlestick pattern is a strong reversal
signal indicating the end of a trend. This pattern can be observed in both
rising and falling trends. In rising trends, the Island Reversal candlestick
pattern marks the peak of the trend and indicates the beginning of a downward
trend. In falling trends, the Island Reversal candlestick pattern marks the
trough of the trend and indicates the beginning of an upward trend.
1. Bearish Island Reversal candlestick pattern
Occurrence: In an uptrend, a gap up forms first, then
prices do not move for a while and form a separate area like a flat zone or
"island" formed during this period. Later, prices separate from this
island area with a gap down, and this usually indicates a reversal of the
current trend. The island area represents a period when the price does not move
for a while or remains at almost the same level. In other words, prices move
sideways for a while. Sometimes a single smaller candlestick (any type of doji-candle)
forms in the island area, and sometimes several candles (marubozu, doji, and
others) form. The candle or candles in the island area can be of any color.
Trade Decision: After seeing the Bearish Island
Reversal pattern, we can place a sell order for the beginning of a downtrend.
However, additional confirmation signals should be awaited to confirm the
reversal. This often involves checking whether other indicators or price movements
support the pattern. Below is a trading example of the Bearish Island Reversal
candlestick pattern in Google Inc. stock:
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| Trading Bearish Island Reversal in Google Inc. Stock |
Entry: In the Bearish Island Reversal pattern, the
point at which the downtrend usually begins or the current uptrend weakens is
the post-gap price movement that starts with the bearish candle. The entry
level can be used to open a short position below this bearish candle.
Stop Loss: As with any trade, a stop-loss level
should be set to limit risk. This level allows you to close your position if
your trade reaches an acceptable loss level. The stop-loss level can often be a
point above the bearish candle where the pattern formed or above a certain
resistance level.
Target: Target setting can vary depending on price
movements, support levels, or other technical analysis tools. For example,
risk/reward ratios, support levels, or Fibonacci retracement levels can be used
for target setting.
2. Bullish Island Reversal candlestick pattern
Formation: Bullish Island Reversal is a candlestick
pattern that occurs at the end of a downtrend and signals the beginning of an
uptrend. First, a gap occurs downward, followed by a period of price
consolidation, which forms a flat area or "island". Then, prices
break out of this island area with an upward gap, which typically signals a
reversal of the current downtrend. Similarly, the island area may sometimes
contain a smaller single candlestick (any type of doji candle), or it may
contain multiple candlesticks (marubozu, doji, and others).
Trading Decision: The Bullish Island Reversal pattern
forms within a downtrend and can indicate the beginning of an uptrend. After
the pattern is completed, we might consider placing a buy order. However,
before placing a trading order, it should be evaluated alongside other
technical analysis tools, indicators, and market conditions. Below is a trading
example of the Bullish Island Reversal candlestick pattern in Coca-Cola Company
stock:
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| Trading Bullish Island Reversal in Coca-Cola Stock |
Entry: The Bullish Island Reversal pattern can
increase the likelihood of a downtrend turning into an uptrend. The entry point
could be the point where the price starts to rise after the gap that begins
with the bullish candle. This level is a point where the uptrend is gaining
strength and the uptrend could begin.
Stop Loss: As with any trade, a stop-loss level
should be set. This level allows you to close your position if your trade
reaches an acceptable loss level. The stop-loss level could be a point below
the bullish candle where the pattern formed, or below a certain support level.
Target: Target setting is used to define the
profit-taking level. The target level can be determined based on the
risk/reward ratio, price movements, resistance levels, or other technical
analysis tools.
Remember, it is important to manage risk and be disciplined
when trading the Island Reversal pattern in the Forex market. As always,
trading based on a single pattern can be risky. This pattern should not be used
on its own. Because, like every formation, the Island Reversal can sometimes be
misleading. Therefore, it should be considered in conjunction with other
technical analysis tools, indicators, and market conditions.