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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Chart Patterns: After the Buy
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Bulkowski's Island Reversals

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Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 12/14/2018
24,101 -496.87 -2.0%
9,514 -158.63 -1.6%
758 -1.70 -0.2%
6,911 -159.67 -2.3%
2,600 -50.59 -1.9%
YTD
-2.5%
-10.3%
4.8%
0.1%
-2.8%
Tom's Targets    Overview: 12/14/2018
25,000 or 23,500 by 01/01/2019
10,100 or 9,000 by 01/01/2019
740 or 775 by 01/01/2019
7,300 or 6,700 by 01/01/2019
2,700 or 2,525 by 01/01/2019

Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

Island bottom and top statistics updated on 12/14/18.

For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., pictured on the right, pages 464 to 479. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.

Island reversal chart pattern
Island Reversal Chart Pattern

 

Important Bull Market Results for Island Reversals

Overall performance rank for up/down breakouts (1 is best): Not ranked
Break even failure rate for up/down breakouts: 31%; 32%
Average rise/decline: 32%; 13%
Throwback/pullback rate: 54%; 55%
Percentage meeting price target for up/down breakouts: 79%; 60%

The above picture shows an island top reversal. The horizontal arrows point to gaps that align at the same price.

The above numbers are based on 850 to 1,000+ perfect trades. See the glossary for definitions.

Island Reversal Identification Guidelines

CharacteristicDiscussion
Price trendTops have price trending upward to the island; bottoms have price trending downward.
ShapeGaps separate a price island from the mainland.
GapsTwo gaps must share some or all of the same price.
VolumeHigh on the day price makes the second gap.
DurationThe island can be one day to several months long.
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Island Reversal Trading Tips

Trading TacticExplanation
Measure ruleCompute the height from the highest peak (A in the Measure Rule figure to the right) to the lowest valley in the island (B) and then multiply it by the above 'percentage meeting price target.' Add the result to the price of the highest peak (A, upward breakouts) or subtract it from the lowest valley (B, downward breakouts). The result is the target price, C, shown only for downward breakouts.
HeightTall islands perform better than short ones.
Throwbacks and pullbacksThrowbacks and pullbacks hurt post breakout performance. Since throwbacks and pullbacks happen so frequently, you can wait for them to complete before taking a position.
Island measure rule
The Measure Rule
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Island reversal chart pattern example

Island Reversal Example

The figure shows an example of an island bottom reversal chart pattern. Price enters the island at A by gapping lower and another gap sharing the same price appears at B. The two gaps mark the island bottom boundaries.

You can see why islands do not work well. This one shows price moving up at B and then reversing, throwing back to the breakout price and continuing lower, ending well below the bottom of the island.

-- Thomas Bulkowski

 

 

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Written by and copyright © 2005-2018 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Error: Keyboard not attached. Press F1 to continue.