Gaps and Gap Analysis

Island Reversal

By March 17, 2016 December 1st, 2018 No Comments

Back to “Technical Analysis Guide”

All Trends Must Come To an End

It’s important for independent investors to develop a general appreciation for and understanding of technical analysis and the way that it can allow you to make more accurate predictions about what the market is going to do next. Instead of relying on societal predictions about whether there will be a demand for a security in the future, technical analysts use tracking software and stock charts to look for patterns like the island reversal, which can indicate that a change is one the horizon for their stocks.

As defined by technical analysts, the island reversal occurs when a particular stock will gap up or down in price, then trade at a level that is higher than this price, before finally gapping down or up at a level that is below the initial price.

The important thing to know about the island reversal pattern is that it is considered to be a reversal trend, so regardless of whether your stock has been behaving in a bullish or bearish manner, spotting this pattern indicates that the trend is probably coming to an end. If this is happening in the middle of a particularly productive uptrend for your stock, this could give you the same sinking feeling that you had when boarding the plane after your vacation. However, the great thing about the market is that when it goes down, it will almost always come up again, so you’re likely to get another chance to profit from those stocks in the future.