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Diamond Chart Pattern

Diamond Chart Pattern

A diamond chart pattern is an extraordinary pattern which is occasional is nature.

It looks identical to head and shoulders patternwith a V-shaped neckline.

Diamond chart reversals occur mostly at major tops and with high volume. It occurs rarely at market bottoms.

It is common to notice diamond bottoms in a bull market with an upward breakout, whereas those in a bear market rank second for overall performance.

“Quick rise is often replaced with quick fall.” is a compensating quality of the diamond bottoms.

How do we identify a Diamond bottom?

The price trend is downward leading to the pattern.

The shape looks like a diamond which is tilted on one side.

Prices make higher peaks and lower valleys (broadening) in the first part of the pattern, and then price action narrows with lower peaks and higher valleys.

Trend lines outline many of the peaks and valleys, forming a diamond shape.

Prices will touch each trend line once or twice. The lines may cross some of the price outliers.

Downtrend 66% of the time and uptrend 69% of the time.

Let’s look at the illustration of Diamond Bottom below:


diamond

We can notice from the figure that, the diamond chart pattern is altered or pushed to one side. This makes it difficult to view the diamonds.

In this illustration, outliers A and B cover the diamond shape.

We can see that the price at D tries to return to launch point C but does not make it much. This shows the behaviour of the pattern which has to be observed at the time of trading. A U-shaped volume pattern is depicted in this diamond bottom.

How do we trade using a Diamond Chart pattern?

The diamond top and bottom are reversal patterns.

It serves as a session to a new high with a drop to a support level followed by a session to make a new high and a quick decline which breaks the support level to make a higher low.

The bounce from the higher low is then followed by a session making a lower high alternatively.

Prices start breaking the trend line connecting the first and second lows and declines further when the behaviour is spotted.

With Diamond bottom, prices pursue the same pattern but they start a new low and a new high followed by subsequent higher low and lower high.

Based on the chart time frame a trader operates, the diamond top and bottom patterns project the period of congestion before a new trend is formed and also the trading sentiment.

It is difficult to spot the diamond patterns as they appear occasionally.

The optimal place to look for the diamond pattern is within the head and shoulders pattern or within the triangle patterns.

Diamond Bottom pattern

The chart below displays a diamond bottom pattern. The diamond shape indicates the short term trend lines connecting the peaks and troughs within the price action.


bottomdimond

We can consider this pattern to be successful when the prices break out of the settled trend lines.

The minimum price target is the distance calculated between the points B and C, projected from the break out of D.

Diamond Top pattern

The chart below displays a diamond top pattern. It operates on the same basis of a diamond bottom pattern in the opposite direction.


DiamondTop

The simplest form to find out these patterns are that they are formed either at the top of the trend or at the bottom of the trend.

Illustration

The chart below displays a diamond top pattern being formed.

We can notice in the chart that, the intermediary highs and lows and the consecutive lower highs and higher lows are formed.

Once the break out from the trend line takes place, the prices start declining well enough to reach the target of the calculated distance between the peak and trough of the diamond top formation.


DiamondTop

A- Starting Triangle

B Bottom Triangle

C High Triangle

D End of Triangle

1- Entry -1 Short entry

E-Target place

Stop loss -2 Stop loss above the high

The chart below is an illustration of a diamond bottom formation.

We can see here, how price formed the high and low and then traded within these peaks and troughs forming a diamond pattern and sooner or later breaking out of the congestion zone. The breakout was pursued by an accelerated session attaining the projected target from the break out level.


DiamondTop

A- Starting Triangle

B Bottom Triangle

C High Triangle

D End of Triangle

1- Entry -1 Buy entry

E-Target place

Stop loss -2 Stop loss below low

The above illustrations of diamond top and bottom patterns reveal that these are steady chart patterns to trade.

When compared to the possible rewards for the trade, these patterns have a low risk. This makes the pattern a good stand alone trading strategy in itself.

Nutshell

1.  A diamond chart pattern is an extraordinary pattern which is occasional is nature.

2.  It looks identical to head and shoulders pattern with a V-shaped neckline.

3.  Diamond chart reversals occur mostly at major tops and with high volume. It occurs rarely at market bottoms.

4.  It is common to notice diamond bottoms in a bull market with an upward breakout, whereas those in a bear market rank second for overall performance.

5.  Bullish Diamond Pattern (Diamond Bottom)

6.  Bearish Diamond Pattern (Diamond Top)

7.  Affirm the existence of a diamond shape on the chart.

8.  Enter the market when the trigger line of the diamond is broken.

9.  Place a stop loss beyond the last top/ bottom inside the pattern.

10.  Stay into the trade for a minimum price move equal to the diamond.

11.  Disregard the VWMA breakouts prior to reaching the minimum target.

12. Once the target is arrived, stay in the market until the VWMA is broken in the opposite direction.

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