Island Reversal

The Island Reversal trading indicator helps traders spot one of the most reliable reversal patterns directly on their chart — the island reversal. This formation signals potential turning points in market trends, whether a bullish trend is about to shift bearish or a bearish trend is preparing to reverse upward. The indicator makes it easy to filter these setups by trend, volume, and range, offering flexibility to display only the most meaningful or pure island reversals.

How to Trade with the Island Reversal Trading Indicator

An island reversal pattern occurs when the market gaps in one direction, consolidates briefly, and then gaps in the opposite direction — effectively isolating a “price island” on the chart. This structure often highlights exhaustion in the current trend and the potential start of a new one.

For traders, island reversals can be used for market timing and trend change confirmation. Recognizing when these patterns develop and monitoring price behavior afterward can help identify strategic entry and exit zones.

Let’s break down the structure of a classic island reversal and how each part contributes to the overall setup.

Each pattern generally includes the following components:

1. A strong preceding trend (bullish or bearish).
2. A gap that signals the start of the pattern.
3. A consolidation phase or trading range — the “island.”
4. A second gap in the opposite direction, closing the pattern.
5. The resulting trend reversal, often marking a significant turning point in price action.

For example, a bullish island reversal typically appears at the end of a downtrend, while a bearish island reversal forms near the top of an uptrend.

Using Trend, Volume, and Range Filters for Smarter Signals

The trend filter ensures higher-quality signals by detecting only top island reversals during uptrends and bottom island reversals during downtrends. You can fine-tune the detected trend size in the settings — larger trend lengths highlight more impactful reversals, while smaller ones capture shorter-term shifts.

The volume filter identifies reversal patterns only when the volume within the “island” exceeds the volume in the prior trend. This reflects a realistic market behavior where traders typically become more active near potential tops and bottoms.

Finally, the range filters allow traders to refine the price action within the pattern:

• Horizontality Filter (R²): Uses the R-squared statistic from linear regression to measure how sideways the price movement is during the island phase. Lower values indicate a flatter consolidation.
• Volatility Filter: Based on long-term volatility, it determines the size of the consolidation range. Higher values allow broader ranges, while smaller values restrict detection to tighter reversals.

These customizable filters help traders adapt the tool to different market conditions, timeframes, and trading styles — from short-term scalping to swing or position trading.

Indicator Settings

Trend Filter

• Trend Filter: Enable or disable the trend-based detection.
• Trend Length: Adjust how large the preceding trend must be to qualify.

Volume Filter

• Volume Filter: Enable or disable volume-based detection.

Range Filter

• Horizontality Filter (R²): Toggle on/off and set the threshold for sideways price movement.
• Volatility Filter: Toggle on/off and set the multiplier value to control how wide the pattern’s range can be.

Style

• Bullish: Choose your preferred color for bullish reversals.
• Bearish: Choose your preferred color for bearish reversals.
• Transparency: Adjust the visual opacity from 100 (fully transparent) to 0 (fully opaque).

FAQ

What is the Island Reversal trading indicator?
The Island Reversal indicator detects powerful reversal formations that can mark key turning points in market trends. It provides advanced filtering options to identify only high-quality setups based on volume, volatility, and trend context.

How can I trade using this indicator?
Look for island reversal signals near strong trend extremes. Confirm the setup using volume and trend filters, and consider using it alongside other LuxAlgo tools for confirmation, such as momentum or structure indicators.

How do I access the Island Reversal indicator?
You can get access to the Island Reversal trading indicator on the LuxAlgo Library, available for popular charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader — completely free.