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

Diamond Chart Pattern

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.

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.

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. 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.

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.

I would prefer to use the majority of candlestick patterns such as the Diamond Chart Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.

The Diamond Chart Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Diamond Chart Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Diamond Chart Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!