Diamond Chart Pattern guide (PDF)
The diamond chart pattern is infrequent in the forex market and the challenge of identifying it is not easy. On the other hand, it is one of the most accurate chart patterns in technical analysis. The diamond chart pattern seems to have the flexibility to be reversed. To explain, it appears either at the top of an uptrend as a bullish diamond pattern. otherwise, at the base of a downtrend as a Bullish diamond pattern. Today’s pattern course will undertake a deep explanation of bullish and bearish diamond chart patterns in the FX market.
Diamond chart pattern FAQ
What is Diamond pattern in forex trading?
On the price chart, the diamond chart pattern appears rarely. Market participants are less familiar with this chart pattern. However, once detected early enough, the diamond chart pattern offers a great trading opportunity for investors. Forex traders often confuse between the Head & Shoulders structure and the diamond chart pattern. Though there are some similarities between the two patterns, there are some significant distinctions as well. Diamond patterns are among the most reliable forex patterns to use when investing, due to their high returns and persistence. These patterns are also known as low-risk trading similar to Shark Pattern. Before searching for them in the charts and starting trading, a trader should clearly understand this pattern and its forms. When applied for long-term trading, diamond patterns provide larger profits, making them ideal for crypto traders.
Price up to a high place and form some tops, if traders can match important highs and lows then they will get a shape like a diamond, called the diamond pattern. The effective break through the lower line marks the formation of a diamond pattern. With forex diamond patterns, you see late breakdowns because it requires a long consolidation inside the triangle, and then it breaks down. The support level links the lows while the upper peak of the diamond provides resistance. The Diamond is a forex pattern that appears at either the top of an uptrend or the bottom of a downtrend. The diamond chart pattern, like other patterns, can be bullish or bearish.
There are two different kinds of diamond patterns:
- Bullish Diamond pattern at the bottom of a downward move
- Bearish Diamond pattern at the top of an upside movement
The distinction between the two is that the diamond top pattern shows at the peak of an uptrend while the diamond bottom pattern appears at the bottom.
Trade entry
A trade entry may occur on the lower right half of a diamond top pattern. However, for a crypto diamond bottom pattern, the top right half could be a signal for investors to open a trade.
Indeed, the trade decision depends on the type of diamond. For example: if the shape formed is a bearish diamond pattern and the breakout also happens on the downside, this is a sale point for traders.
Bullish Diamond pattern example
A bullish diamond is also known as a diamond bottom pattern as it arises at the base of a downside move on the trading chart. It consists of two symmetrical triangles that are positioned in a diamond shape. To explain, a bearish trend precedes the construction of a diamond bottom. This bullish diamond pattern makes it possible to reverse a recent downtrend into a future uptrend. In the first phase of the pattern, prices have higher peaks and smaller troughs. Then, prices start having lower peaks and higher troughs. The breakout happens once the price breaks through the pattern’s lower right side.
Bearish Diamond pattern example
The bearish diamond is known as the top diamond pattern because whenever this chart pattern happens, prices begin to shift and hence a downward trend begins. A bullish diamond top pattern makes it possible to reverse a recent uptrend into a future downtrend in forex trading. To clarify, it is preceded by an uptrend in market prices and generates higher profits than a diamond bottom pattern formed after a downtrend in market prices. The diamond top denotes the end of the prevailing bullish trend as well as investor hesitation.
How to trade diamond chart patterns?
The first step is to find the diamond on the graph. The key challenge is to distinguish the pattern from a head and shoulders pattern and to avoid being misled by certain chart abnormalities because the typical diamond shape may not exist. Thus, investors need to learn how to recognize the “diamond” in the charts.
Trading the Diamond top structure
Before starting trading a diamond top pattern, a trader needs first to make sure that a clear uptrend precedes this pattern formation. Hence, confirm the existence of a real diamond top structure that has happened.
With a diamond top pattern, whenever the price breaks the diamond’s lower right side, this is an opportunity for a trader to sell.
To avoid risk and prevent losses, investors set a stop loss above the recent top that occurred inside the diamond top pattern.
The price target for a diamond top pattern is determined by measuring the distance between the pattern’s peak and lowest points, after which plotting that distance (the height of the diamond pattern ) down from the breakout point.
Trading the Diamond bottom structure
Before starting to trade a diamond bottom pattern, a trader needs first to make sure that a clear downtrend precedes this formation. Hence, confirm the existence of a real diamond bottom structure that has happened.
With a diamond bottom pattern, whenever the price breaks the diamond’s upper right side, this is an opportunity for a trader to buy.
In order to minimize losses, traders set a stop loss below the recent that occurred inside the diamond bottom pattern.
To determine the price target for a diamond top pattern, traders need to calculate the height of the diamond pattern, after which plot that distance up from the breakout point.
Conclusion
Despite the fact that the diamond chart pattern is not well-known among traders, it may offer great trading opportunities. Furthermore, a low-risk trading tool could describe this chart pattern. However, investors need to understand well the concept of this pattern and how to trade them.
Key Takeaways
- The Diamond pattern is an uncommon chart pattern that is highly reliable.
- It is easy to confuse the diamond chart pattern with a head and shoulders pattern.
- An uptrend movement precedes the formation of a diamond top pattern.
- A downtrend movement precedes the formation of a diamond bottom pattern.