How to Trade the Diamond Chart Pattern

Prices then drop once again but this time, they stay above the previous swing low point. This approach can provide a better risk-to-reward ratio, as the entry price is closer to the resistance level, and the stop loss can be placed tighter. A Diamond Top to is a diamond-shaped chart pattern that appears at top of a trend as a reversal pattern. The diamond pattern is a rare reversal pattern that can produce a powerful move in the opposite direction when confirmed.

• Your price target can be the height of the diamond, or slightly below it.
• Trading the diamond chart pattern is possible using the Margex margin trading platform.
• They are named after the diamond shape formed when the lines connecting the price highs and lows form a diamond shape.
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Most often, you’ll find diamond bottoms in a bull market with an upward breakout. A redeeming
quality of diamond bottoms is that a quick rise sometimes follows a quick decline. The red arrow on the image shows the moment when the minimum potential of the pattern is reach, which represents the total size of the diamond formation from the breakdown point. You are one of those traders who know how to trade the diamond pattern well. Overwhelming selling pressure will result in a breakdown below the support level, while strong buying demand will lead to a break above the resistance level. The process then reverses, and the trading range narrows into a triangle or wedge shape before a breakout occurs.

Identify diamond pattern in trading

After that, the price action changes, with the peaks being lower and the troughs – higher. Diamond bottom patterns are recognized similarly, except https://forexhero.info/image-manipulation/ that a downtrend precedes them. Diamond bottoms represent only 20% of cases but announce a sharp rise in prices at the exit of the pattern.

Therefore, you need a solid and accurate approach to correctly spot this pattern. These patterns are rare; meanwhile, they often break up or down regardless of bullish or bearish indicators. Now that we have properly classified this as a diamond formation, let’s now dissect the other aspects of this potential trading opportunity.

Strategy of work using Diamond Bottom pattern in the GBP/USD chart

You may notice diamond lows in a bull market with an upside breakout, while for overall performance, those in a bear market always come second. It broke above the formation’s upper line, but it retested the pattern later (1). Once the breakout occurs, traders can use the diamond to project a potential price target. Traders may also use multiple timeframe analyses for confirmation.

The long entry signal is triggered at the break and close above the upper right-hand line sloping downward. Diamond patterns are reversal indicators that project a pending bullish or bearish breakout. Thus, one buys or sells the market according to whether the diamond formation occurs at the bottom of a downtrend or top of an uptrend.

Which one is more accurate: diamond tops or diamond bottoms?

Four barely equal-sized trendlines and swing lows connect at the structure’s top and bottom upon complete circulation, respectively. Again, this is where the pattern comes into play – DIAMOND PATTERN. The highs and lows of a price in Diamond top and bottom can be seen as four points (A, B, C, and D), forming peaks and troughs. The price reversal happens after the formation of the top and bottom at point D. Forty minutes after the price completes the minimum target, the price action closes with a big bearish candle, which breaks the VWMA downwards.

If you compare a head and shoulders pattern to a diamond pattern, you’ll notice that both of them look quite similar, and share the same characteristics. When it comes to technical analysis, you can’t just ignore the importance of buying and selling volume because it tells you exactly what’s going on in the market right now. Your price target can be the height of the diamond, or slightly below it. You can also use Fibonacci retracement levels to set your target profit.

Understanding Diamond Top Formations

FXOpen offers ECN, STP, Micro and Crypto trading accounts (dependent on entity). The stoploss should be placed at the most recent swing low preceding the breakout point. The stoploss should be placed at the most recent swing high preceding the breakout point. Accordingly, each pattern suggests a possible chance to buy or sell a market. Due to the way both patterns develop, the pattern can first appear to be one or the other, then develop into the opposite pattern or something different entirely.

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Like in reversal diamond patterns, the price creates high and low peaks but then narrows its range and, after a while, goes back on track in the same direction as the main trend. The psychology behind the diamond top pattern is that the upper trendline represents the resistance level, where sellers are in control and pushing the price lower. A diamond pattern is somewhat easy to identify due to its diamond shape. However, they can be tricky as diamond patterns are rare and often develop into different shapes. Trading diamond patterns takes patience and a sharp eye since they are extremely rare.