Island Reversal patterns are among the rarest candlestick formations. However, they are also very strong short-term reversal patterns.
How to Use Island Reversal Patterns in Binary Options Trading
Here you will learn how to identify and trade the Island Reversal patterns as part of your binary options trading strategy.
How to identify the Island Reversal Patterns
These patterns are formed when two types of gap, the exhaustion gap and a breakaway gap form at the same price point. This typically takes place at the top or at the lower level of a rally. When the pattern forms at the top of a rally, it is known as an island top reversal and as an island bottom reversal when it forms at the bottom of a rally. Island reversal patterns are characterized by a gap that occurs between a reversal candlestick and two candlesticks occurring on either side of the reversal candlestick.
Given that these are reversal patterns, they occur when the bull and bears are both aggressive. The result is a long doji candlestick that triggers a high trade volume, which occurs after an extended previous trend. These are the three main characteristics of an impending reversal pattern.
When trading the island reversal pattern, it is common to identify a sharp reversal. However, this sharp reversal is not an indication of an extended reversal and as such, it would be rational to exit your position when the reversal takes place. In the event that the next candle fills up the gap, this will make the reversal invalid and you should exit the trade carefully.
It is common for these patterns to form as a reversal pattern with multiple candlesticks, instead of forming with just a single candlestick. The fact that the pattern forms in multiple candlesticks makes it easier to identify the island reversal pattern. However, when the pattern forms in this way, it is usually an indication of a weaker reversal.
How to trade Island Reversal Patterns
As mentioned before, Island Reversal patterns form rarely but you can use these formations strategically to take profit when trading binary options. When island top reversal patterns occur, an exhaustion gap forms in an upward trend.
Note: Exhaustion gaps are a type of gap in candlestick charts that form when the bulls are particularly strong. Usually, exhaustion gaps are filled in fast by trade volume, causing the price to start declining. However, in some instances, the bulls can suddenly lose their strength, causing prices to fall in a downtrend gap. As such, the island reversal patterns forms i.e. when the first exhaustion gap occurs at the same price level as the second gap, which is a breakaway gap.
When an island reversal pattern occurs at the bottom of a rally, it typically takes place as a long term bear market comes ends. At this point, when the bears are strong and causing a decline in lower prices, the exhaustion gap forms. The island bottom reversal therefore takes place when the bears lose their strength, causing prices to rise with an upward gap.
To mitigate losses when trading the island reversal patterns, it is important to adhere to certain rules:
· Look out for a rise in trading signals. When trading the island reversal, the trade volume needs to be high and the increase should occur on both exhaustion and breakaway gaps.
· The trading signal is usually strong when the island reversal takes place after a long-term, strong trend. The pattern can also form as a correction is coming to an end and it is reasonable to trade the pattern as it indicates an impending end.
· Narrow islands provide lucrative trading opportunities, whether these are island reversal tops or island reversal bottoms.
· Look out for island reversal patters forming at other support and resistance levels.
· After an island reversal pattern forms, prices usually reverse. Remember, if price movements fill the gap, the island reversal patterns are no longer valuable. As a trader, you would be better off placing the stop loss nearer to gap when you initiate a trade.