Diamond pattern trading

Accordingly, each pattern suggests a possible chance to buy or sell a market. It is important that you understand what it takes to be successful and to achieve the level of skills necessary to succeed. Thus prepared for a short position, and I’ll show you how to do that shortly. So much so that they are able to pull back a upward move swiftly, and create new lower lows. The underlying reason is that sellers have entered the currency in an aggressive way.

It will provide a level where we can expect the continuation of the breakout to begin to wane or possibly reverse. Diamond tops typically form at the end of an uptrend which makes them a powerful signal for a reversal. Usually, these patterns will look similar to an off-center head and shoulders pattern or a flattened double top pattern. The diamond top formation is established by first isolating an off-center head-and-shoulders formation and applying trendlines dependent on the subsequent peaks and troughs.

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As such we will need to monitor the price closely for potential signs of an emerging diamond chart formation. If we look at the EURCAD price chart again, we can see the diamond top pattern outlined. Diamond top reversal patterns are one of several trend reversal patterns that can help a trader determine a security’s price momentum at its resistance level. If a diamond top reversal is detected, then a trader will likely sell, or short sell, to profit from a new downtrend formation. In the chart above, the price formed a bullish diamond after a prolonged downtrend.

Diamond pattern trading

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The ideal diamond bottom has a sharp decline followed by a consolidation period. The consolidation period is important because it shows that the selling pressure is weakening. On the other hand, an upward breakout indicates that buyers have won the battle, and they are willing to step in to push the price higher.

How to Trade with the Diamond Pattern

Visually, the diamond formation and head and shoulders chart pattern are similar. In that sense, a bullish diamond pattern is similar to the inverted head and shoulders chart pattern. The bearish diamond formation develops after a robust uptrend in price.

  • However, there is a risk of a missing trade as the price may keep moving in a breakout direction without a retracement.
  • The breakout should be accompanied by an increase in trading volume, which adds further confirmation to its validity.
  • It can also be identified as an extraordinary model who is casual in nature.
  • The diamond pattern is one of the most popular formations in trading.

A diamond top that occurs after a rise in market prices generally provides a higher probability of a trade than a diamond bottom pattern after a decline in market prices. You’ll need to do your testing to see if this trend matches the markets you are trading. As with all patterns, diamond chart patterns have both advantages and disadvantages.

Diamond Pattern Trading Explained

Some traders prefer to wait only for a break below this line without a requirement for a close below it. This is also a possible entry point; however, be aware that it will result in more false signals than waiting for a breakout and a close condition. When the diamond top formation is combined with a price oscillator, the trade becomes an even better catch. Volume throughout the diamond formation should be diminishing as traders are uncertain of which way the market will go next.

  • They play a vital role in researching market trends and predicting movements.
  • Another strategy is to look for price retracements after the breakout.
  • For example, one of the tools often used in such cases is a price oscillator.
  • Sometimes, we may not see each and every up and down price leg noted earlier within the pure definition of the diamond structure.
  • The battle between buyers and sellers results in a sideways trading range (or consolidation) that forms between key support and resistance levels.

Once the breakout occurs, traders can use the diamond to project a potential price target. For example, if a diamond is forming on the hourly chart, traders may look at higher timeframes, such as the 4-hour or daily chart, to confirm the breakout direction. If the breakout aligns with the trend on multiple time frames, it may provide a stronger trading signal. The diamond is a reversal pattern, meaning it can signal a potential trend change in the market.

Can I trade diamond patterns in any timeframe?

This is usual information for when we want to target a take profit level. Once you have identified the bullish diamond chart at the end of the downtrend, you can prepare an order to enter long. Thereby, there is a period of instability where certain volumes reinforce investors. Then, the final breakout occurs when investors capitalize on the current level. The opposite of diamond highs is the formation of diamond bottoms which occurs after a strong downtrend in a security or currency pair. A diamond top pattern doesn’t occur too often, but when it does appear, it can be a sign of a strong reversal in trend on the assets.

Diamond chart patterns in trading

It is one that is less well known to technical traders and investors alike. As such, many traders are not very familiar with its structure or trading application. In this lesson, we will dive into the specifics of recognizing and trading the diamond pattern.


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