How to calculate the decline after the daily level island reversal is established?

The island reversal pattern signals a potential trend change, often indicating exhaustion and a sharp pullback or rally.

Jun 20, 2025 at 02:08 am

Understanding the Daily Level Island Reversal Pattern

The island reversal is a rare and powerful candlestick pattern that signals a potential trend change. On the daily chart, this pattern occurs when there is a gap up or gap down, followed by one or more isolated candles (the island), and then another gap in the opposite direction, creating a visual separation from prior price action. The key elements of this pattern include:

• A strong move in one direction
• A gap that isolates the middle candles
• Another gap in the opposite direction with no overlapping price levels
• A confirmed shift in momentum

This pattern often indicates exhaustion in the current trend and the beginning of a reversal. Traders use it to anticipate sharp pullbacks or rallies depending on the context.

Identifying the Confirmation of the Island Reversal

Before attempting to calculate any decline or rise, traders must first ensure that the island reversal has been fully confirmed. This involves checking for:

• Clear gaps before and after the island formation
• No overlap between the gap-down or gap-up candles and the island candles
• Volume spikes during the gaps, which can act as additional confirmation

Traders should wait until the last candle of the reversal closes and the second gap forms without touching the previous range. Once confirmed, the next step is to determine how far the price might travel after the reversal.

Determining the Measurement Objective

One of the most reliable ways to estimate the potential decline after a bearish island reversal is by using the measurement objective technique. Here’s how it works:

• Measure the vertical distance between the first gap and the highest point of the island
• Subtract that same distance from the closing price of the confirmation candle
• That level becomes your target for the decline

For example, if the island spans from $10,000 to $10,500 and the first gap starts at $9,800, the measurement would be $700. If the confirmation candle closes at $10,600, subtracting $700 gives a target of $9,900.

This method doesn’t guarantee accuracy but provides a statistically useful benchmark for setting profit targets or stop losses.

Using Fibonacci Retracements in Conjunction

Another approach involves combining the island reversal with Fibonacci retracement levels to better assess the decline potential. Here’s how to do it:

• Identify the recent swing high and low before the island reversal
• Apply Fibonacci retracement from those points
• Observe where the island reversal aligns with key Fibonacci levels such as 38.2%, 50%, or 61.8%

If the island reversal forms near the 61.8% retracement, it could signal a stronger reversal and deeper decline. In such cases, the expected drop may extend beyond the initial measurement objective, especially if volume supports the move.

By overlaying these tools, traders gain a clearer picture of where support might appear or where the price might stall temporarily during the decline.

Monitoring Volume and Momentum Indicators

Volume plays a crucial role in validating the strength of an island reversal and predicting the extent of the subsequent move. When analyzing the potential decline, consider the following:

• A sharp increase in volume during the second gap confirms institutional participation
• Declining volume during the decline suggests weakness in the selling pressure
• Use momentum indicators like RSI or MACD to gauge overbought or oversold conditions

If the RSI drops below 30, it may indicate that the decline is nearing a short-term bottom. Conversely, if MACD remains bearish and continues to make lower highs, the decline may persist longer than the initial measurement projection.

Traders should avoid blindly following projections and instead monitor real-time signals for signs of exhaustion or continuation.

Practical Steps to Calculate the Decline

To summarize the practical steps involved in calculating the expected decline after a daily level island reversal, follow this guide:

• Confirm the presence of a valid island reversal pattern
• Measure the height of the island including the first gap
• Project that distance downward from the close of the confirmation candle
• Overlay Fibonacci retracements to identify confluence zones
• Watch volume and momentum indicators for confirmation of the decline's strength

Each step must be executed carefully to avoid false signals. Misidentifying the island or miscalculating the projection can lead to incorrect trade setups.

Frequently Asked Questions (FAQ)

Q: Can island reversals occur in cryptocurrencies like Bitcoin or Ethereum?

A: Yes, island reversals are applicable to all financial markets, including cryptocurrencies. Due to the volatile nature of crypto assets, these patterns may form more frequently, especially around major news events or macroeconomic shifts.

Q: Is it possible for an island reversal to fail?

A: Like all technical patterns, island reversals are not 100% accurate. False breakouts and whipsaws can invalidate the pattern, particularly in illiquid or highly volatile market conditions. It’s essential to combine it with other confirmation tools.

Q: How long does the decline typically last after a bearish island reversal?

A: The duration varies based on market structure and broader sentiment. Some declines unfold quickly within a few days, while others may take weeks to reach the projected target, especially if the market consolidates along the way.

Q: Should I always trade every island reversal I see on the daily chart?

A: No, not every island reversal offers a high-probability setup. Focus on those that form at key support/resistance levels, Fibonacci confluence areas, or after extended trends. Filtering with volume and momentum improves success rates.