Reasons for the formation of island inversion:
1. Changes in market sentiment: Before the formation of island inversion, the market usually experienced a period of intense price fluctuations, which led to drastic changes in investor sentiment. This kind of mood change may prompt the price to rise or fall rapidly, forming a gap.
2. Weak trend: In the process of island inversion, the original price trend may gradually lose momentum and cannot maintain the previous rising or falling speed. When the market realizes the weakness of the trend, the price trend may reverse rapidly, forming a downward gap of island reversal.
3. Major news or events: Sometimes, the island reversal of the market may be caused by major news or events. These events may lead to drastic fluctuations in the market, leading to a rapid rise or fall in prices, thus forming an island-shaped reversal.
trading strategy of island inversion:
1. Identify island inversion: When there are upward and downward gaps in the chart, and these two gaps form an isolated "island" shape on the chart, it can be identified as island inversion.
2. Set stop loss and take profit: When the trading island is reversed, set appropriate stop loss and take profit levels. Usually, the stop loss can be set at the lowest price below the island reversal pattern, and the take profit target can be set at the top of the island reversal pattern.
3. homeopathic trading: after the formation of the island-shaped reversal pattern, if the market trend is in line with expectations, you can homeopathic trade, buy or sell to make a profit.
It should be noted that the island reversal pattern is only a possible trend reversal signal, which does not mean that the market will definitely reverse. In actual trading, it is necessary to combine other technical analysis tools and fundamental information to make more accurate trading decisions.