From Traderpedia

Definition: A chart pattern that occurs when the price of a security gaps up (or down), trades above (or below) the gap for a while, and then gaps down (or up) past the first gap.

This is a very powerful and seldom seen reversal pattern and is also known as the Abandoned Baby formation in candlestick terms. It can be found both at the top of an uptrend or the base of a downtrend.

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For example in a downtrend, the Island reversal formation is formed when the middle (second) candle gaps down from the low of the previous candle. At this point the bears will still feel assured that they are in control, however this candle will turn out to be a small candle with little range.

It is the third candle which signals the reversal as this candle will gap upwards from the high of the second candle to open as a clear candle which closes near the top of its range.