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THE ISLAND REVERSAL

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THE ISLAND REVERSAL

The performance of island reversals is perhaps surprising only for its mediocrity. Failure rates for both tops and bottoms are reasonable, holding below the 20% threshold that I view as the maximum allowable for reliable formations. The average decline from an island top ranges between 17% and 23%, depending on market conditions. The range is similar to many other bearish chart patterns. However, the average rise from an island bottom is a disappointing 21% to 23%, and that is well below the 35% to 40% I like to see for bullish chart patterns.


With these mediocre performers, trading every island that you see is a way to drown in losses. You can improve performance by selecting patterns with the proper height and width characteristics for the market you are trading, as described later in this chapter. Pullbacks and throwbacks are prevalent, suggesting that the gap after the island completes closes quickly. Investors can make use of this behavior to delay their inves…