Island Formation

Trend is your friend. Dance with the friend. Tune to the trend.

Island Formation is a reversal chart pattern, formed by price action in a group of multiple time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.

Pattern Formation
When a down trend is at its end, it will make its last lap by creating an exhaustion gap. The stock looses its steam and hovers at the same level for a few days. When the current trend is totally culminated, the prices reverses and breaks out with a breakaway gap, and an up trend begins.

This leaves behind an island of bars / candlesticks. Thus it is called as Bullish Island Reversal Formation.

The break away gap usually fills in a few days by a pull back price action, before the new trend continues.

Dojis or candlesticks with long lower wicks are common features with in the islands.

Study the chart given below.

island formation, island reversal, chart patterns

How to trade?
These are traded in the same way as the break away gap. An entry is made above the break away gap, with the stop loss below the gap.

Similarly at the end of an up trend, we get Bearish Island Reversal, characterised by candlesticks with long upper wicks. Here an entry is made below the break away gap, with the stop loss above the gap.

An island can form with a solitary candle, instead of several candlesticks. This formation is called as an Abandoned Baby.

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