Diamond is a powerful reversal pattern. Although it does not appear often, entering orders with this pattern has a high success rate. So what is the Diamond pattern? What are the features and how to trade with this pattern? Let’s find out through the article below.
What is the Diamond pattern?
The Diamond pattern is made up of 2 triangles joined together. They are shaped like diamonds or rhombus on the chart. This is considered one of the strongest reversal patterns that appear in the market trend.
This pattern is divided into 2 types.
Diamond Top is in an uptrend, consisting of an expanding triangle (<) when the price is ascending from left to right and a narrowing triangle (>) when the price is descending from left to right. This pattern is fully formed when the price turns down and breaks out of the “diamond”.
Similar to the above, the Diamond Bottom is distinguished by the fact that the price trend is bearish before it appears and an upward breakout occurs when the price breaks through the resistance level.
Features
The way to recognize the Diamond pattern on the chart is to connect the tops and bottoms. If they form a quadrilateral that resembles a rhombus, that’s the pattern we’re looking for.
The pattern has two lower support levels and two upper resistance levels creating a high and a low.
After the pattern is formed, it will give out a pretty strong price reversal signal. When the price falls, it breaks the lower right edge (support level) of the diamond known as the Diamond Top. It also breaks the right upper edge (resistance level) to go up, which is called the Diamond Bottom.
Meaning of pattern
The Diamond pattern is a confirmation of the current trend reversal. Traditionally, this pattern is formed in an uptrend.
The pattern is characterized by first widening and then narrowing range of price movements. So the trajectory of the movement resembles a diamond or rhombus. Two bottom-up support levels and two top-down resistance levels combine and represent the low and the high of the pattern respectively.
As soon as the right support or resistance level is broken (plus a certain deviation possible), that would be a warning signal to the trader that the trend is about to change.
How to trade with the Diamond pattern
To get the most out of the Diamond pattern, you must know how to trade with it. Especially, we will trade as soon as the price breaks out because we can’t wait for a retest. Here are some effective trading strategies that professional traders use.
For the Diamond Top
Entry: for the Diamond Top pattern, we focus on the bearish order. Wait for the price to penetrate the pattern, you can enter a bearish order at the lower point of the right edge as shown. However, to avoid being trapped by the market, investors need to wait for the candle to complete before determining the breakout point.
Stop Loss: Although Diamond Top has a high probability of success, it can still be affected by unexpected market fluctuations. Therefore, traders need to always place a stop loss to protect themselves. Stop loss should be placed at the top, closest to the entry point.
Take Profit: Set the take profit point so that the distance from it to the breakout point is equal to the height of the quadrilateral.
Note:
- You should not enter a position when the pattern has not been completed or should not trade inside the pattern.
- To be sure of a reversal, traders can use technical indicators or reversal candlestick patterns.
For the Diamond Bottom
Entry: For Diamond Bottom, we focus on bullish orders. The best opportunity to enter is when the price breaks out of the resistance level of the pattern. To limit the risk, we will wait for the candle to close above the resistance level to enter the order.
Stop Loss: The stop loss should be placed at the bottom of the Diamond Bottom or the bottom closest to the entry point.
Take Profit: Set the take profit point so that the distance from it to the breakout point is equal to the height of the quadrilateral.
The Diamond Top/Bottom pattern will help you master the market when predicting future trends most effectively. However, please judge correctly before putting money into actual investment. Good luck with your trading.
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