What Is The Diamond Chart Pattern & How To Trade With It

The Diamond pattern is a reversal pattern that appears at major tops and bottoms. It rarely surfaces on the chart and has a V-shaped neckline. A bearish diamond formation or diamond top is a technical analysis pattern that can be used to detect a reversal following an uptrend; however bullish diamond pattern or diamond bottom is used to detect a reversal following a downtrend. A Continuation Diamond chart pattern forms when the price has broken upward out of a consolidation period, suggesting a continuation of the prior uptrend. The chart pattern begins during a downtrend as prices create higher highs and lower lows in a broadening pattern.

What is the Diamond chart pattern?

The Diamond pattern, with its unique appearance, identifies a potential reversal. It comes in two types; Diamond bottom and top. Diamond chart formation is a rare chart pattern that looks similar to a head and shoulders pattern with a V-shaped neckline. Diamond chart patterns usually happen at market tops.

a. Diamond Top

The Diamond top occurs at the major tops. It presents that price rallies to a new high then drops to a support level, goes up again, and then declines back to a support level to form a new low.

Diamond top pattern on a chart
Diamond top pattern on a chart

b. Diamond Bottom

The Diamond bottom forms at the major bottoms and is the opposite of the Diamond top. It displays that price declines to a new low, then hurried its way up to a resistance level, drops again, and then rises back to a resistance level forming a new high.

Diamond bottom pattern on a chart
Diamond bottom pattern on a chart

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. This gives the pattern V and inverted V like structure. The price reversal happens after the formation of the top and bottom at point D.

On stocks and forex charts, the development of the Diamond top is more common than Diamond bottom.

The Diamond top and bottom kind of looks like the Head and Shoulders and Inverted Head and Shoulders pattern. The Diamond is a variation of Head and Shoulders pattern. However, a trader shouldn’t consider every Diamond pattern as Head and Shoulders as Diamond signifies a trend reversal much earlier than Head and Shoulders. There are specific cases when the Diamond resembles Head and Shoulders. For example, Diamond occurring at the top with high-volume.

How to use the Diamond chart pattern?

To apply the Diamond pattern, traders take their long and short positions at point D. The Diamond bottom is a bullish pattern, while the Diamond top represents a bearish pattern.

In Diamond bottom, traders go long at the point D with a stop-loss placed near the recent swing low. On the other hand, traders go short in the Diamond top with a stop-loss placed near the last swing high.

Traders should wait for the confirmation of the pattern before entering the trade. This is because the Diamond becomes valid only after a breakout. In breakouts, the price rallies and declines very quickly, therefore there is a risk of price going against the trader’s position.

Another method of implementing the Diamond is to combine it with technical indicators like Moving Averages. These technical indicators could help in filtering any false signals.

Diamond chart pattern trading strategy

As mentioned earlier, the Diamond pattern rarely makes an appearance on the charts. The diamond pattern is visually discernable due to its diamond shape. It appears similar to the head and shoulders pattern. A good way to look for the pattern is within the Head and Shoulders. This can be done by locating the pattern on shorter or longer timeframes.

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. Diamond tops and head and shoulders patterns are bearish indicators. Each gives the trader a way to sell or short the market. The chart below is a good illustration of the head and shoulders pattern.

It is fairly simple to trade forex using the diamond bottom or diamond top formation. All you need to do is determine market entry, locate your stop loss, and select a viable profit target. Then, the trade execution process is streamlined.

Diamond chart pattern buy strategy

  • Locate the Diamond bottom on the chart.
  • Wait for the price bar to go bullish before entering.
  • Enter after the formation of the Diamond bottom.
  • Place a stop-loss near the recent low from the pattern.
  • Exit the trade before the price moves in the opposite direction.

Diamond chart pattern sell strategy

  • Look for the Diamond top on the chart.
  • Wait for the price bar to go bearish before entering.
  • Enter the trade after the formation of the Diamond top.
  • Place a stop-loss near the recent high from the pattern.
  • Exit the trade before the price moves in the opposite direction.

Diamond chart pattern conclusion

Although the Diamond pattern doesn’t regularly emerge on the charts, the Diamond is a possible indicator of a price reversal. The Diamond Chart Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. You can learn more about it on the chart patterns cheat sheet.

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