The island reversal pattern trading strategy as the name says is based on the Island reversal pattern.
It is a price action trading system.
Now, I don’t use this trading system but from my experience, it would be very rare to find this kind of pattern in the forex market because of its high liquidity.
But in the share market, you may have a chance of finding the islands reversal patterns.
What Is The Island Reversal Pattern?
Well, I’d better let the charts do the speaking and explaining.
There are two types of island reversal patterns, the bullish and the bearish pattern.
This is what a Bearish Island Reversal Pattern Looks like:
This is what a Bullish Island Reversal Pattern Looks Like:
How To Trade The Island Reversal Patterns
The trading rules are really straight forward.
- identify the bearish island pattern
- you can either use a market sell as soon as you see the bearish gap form or wait for that candlestick to close first then place a pending sell stop order as shown below.
- your stop loss should be placed on the other side of the bearish gap.
- for take profit, aim for 1:3 risk:reward or aim for the previous swing low.
- identify bullish island chart pattern
- you can use a market order or sell stop order as soon as the candlestick makes a bullish gap as shown on the chart below or wait for that candlestick to close and use a buy stop pending order.
- place your stop loss on the other side of the bullish gap.
- profit should be 3 times or more what you risked initially aim for the previous swing high
As stated above, the island reversal patterns rarely form in the forex market but if you happen to see one, you may need to use this trading strategy to trade it.
One thing you will notice is that the stop loss distance are not “tight”.
The reason is because sometimes price has a tendency to move and fill the gap before going in the original direction and for that, the stop loss has to be placed on the other side of the gaps.