Island Reversal

Overview

An island reversal is a price range bracketed by gaps on both sides — a span of trading isolated from the prior and subsequent price levels, floating like a small island above or below the rest of the chart. The Japanese name 離れ小島 ("distant little island") captures the image perfectly.

At a top, the uptrend jumps onto the island via a gap up, spends some time on it, then jumps off via a gap down. At a bottom, the inverse — a gap down onto the island, a gap up off it.

The power of this pattern lies in the fact that every participant who traded on the island is suddenly stranded between two voids. Their entry prices are no longer continuous with either the prior trend's prices or the new trend's prices. With no path back, they unwind fast — and that unwinding accelerates the reversal.

One important caveat up front: the island reversal is principally an equity-market pattern. In 24-hour markets like FX, gaps appear only at weekend opens, so a pure island reversal is rare.