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Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
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.
In a bull market, island reversals are the worst performing chart pattern. The break even failure
rate is high for a chart pattern and the average rise or decline is mediocre.
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Island Reversal Chart Pattern
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 23 out of
23; 21 out of 21
Break even failure rate for up/down breakouts: 18%; 17%
Average rise/decline: 23%; 17%
Throwback/pullback rate: 70%; 65%
Percentage meeting price target for up/down breakouts: 69%; 62%
The above picture shows an
island top reversal. The horizontal arrows point to gaps that align at the same
price.
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Identification Guidelines
| Characteristic | Discussion |
| Price trend | Tops have price trending upward to the island; bottoms have price trending downward. |
| Shape | Gaps separate a price island from the mainland. |
| Gaps | Two gaps must share some or all of the same price. |
| Volume | High on the day price makes the second gap. |
| Duration | The island can be one day to several months long. |
Trading Tips
| Trading Tactic | Explanation |
| Performance | In case you missed it, this pattern has the worst performance rank of any chart pattern – dead last – regardless of the breakout direction. |
| Measure rule | Compute 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. |
| Height | Tall islands perform better than short ones. |
| Height, width | Islands both tall and narrow perform especially well for both breakout directions. |
| Volume shape | Islands with upward breakouts and U-shaped volume perform
well as do those with downward breakouts and a random volume shape (neither U nor dome shaped). |
| Throwbacks and pullbacks | Throwbacks and
pullbacks hurt post breakout performance. Since throwbacks and pullbacks happen so frequently, you can wait for them to complete before taking a position. |
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 The Measure Rule
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Example
The above 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 form the island bottom.
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
Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. Error: Keyboard not attached. Press F1 to continue.
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