What it looks like
A gap down: a candle opens clear below the previous low. A small cluster of candles trades in that lower pocket. Then a gap up: a candle opens clear above the cluster's high. On the chart the cluster sits alone like an island, with empty space either side. It needs a market that gaps, such as indices at the cash open or gold over a weekend.
What it means
Everyone who sold into the gap down and traded in that pocket is now on the wrong side, with price above all of their entries. The second gap shows sentiment flipped while the market was closed or thin. Because both gaps leave clear levels, the setup has an obvious point where the idea is cancelled.
How to trade it
- 1
Mark the second gap: from the top of the stranded candles up to the low of the gap up candle.
- 2
Confirmation: the gap up holds and price stays above the island.
- 3
Entry: buy while price holds above the gap.
- 4
Stop: below the second gap, at the top of the island. Example on US30: island tops at 46,700, gap up opens at 46,820. Buy at 46,830, stop at 46,690, a 140 point risk.
- 5
Target: the level where the first gap down began, then the next resistance.
The second gap is filled: price trades back down into the island.
Where it works best
On daily charts of indices and shares, and on gold around the weekly reopen, where real gaps appear.
WickSpeak spots island bottoms automatically and names them on the candles that made them. The note covers what it is, how to trade it and that a filled second gap proves it wrong. In Playbook you can use it as a condition in a play, alone or alongside other patterns and indicators (any of the 146 patterns can be a condition), and backtest it on past candles with your own costs.
Common mistakes
- Looking for islands on markets that rarely gap, where the shape cannot form properly.
- Accepting tiny gaps of a point or two as real gaps.
- Placing the stop deep inside the island instead of below the second gap.
Related patterns
Questions traders ask
What is an island reversal?
A cluster of candles separated from the rest of the chart by a gap on each side. An island bottom forms after a fall and is bullish; an island top forms after a rise and is bearish.
Does gold form island bottoms?
Rarely on intraday charts, because gold trades almost continuously in the week. They are more likely around the weekend gap or on markets with a daily close, such as indices.
Where is the stop on an island bottom?
Below the second gap, at the top of the stranded candles. If price fills that gap the pattern has failed.
Is an island bottom bullish?
Yes. It shows traders who sold in the lower pocket are now trapped below the market.