Traders often use candlesticks patterns to identify the entry points for their transactions. Today, I am going to present one that is called a Diamond pattern. It has two variations, diamond top, and diamond bottom formations. As you can imagine, its name comes from the shape it creates. It is used to identify the reversal of the trend.
Key Takeaways🔑
| →Diamond patterns are trend reversal indicators found in financial charts, with two variations: diamond top and diamond bottom. |
| →They represent a fight between buyers and sellers, leading to a shift in trend direction. A diamond top signals a shift from an uptrend to a downtrend, while a diamond bottom signifies a shift from a downtrend to an uptrend. |
| →These patterns do not guarantee profit but can offer useful insight into potential market trend reversals. Always manage your risk accordingly when trading. |
Contents
How to identify the diamond top pattern
The diamond top pattern does not appear very often. It may be found during the uptrend when the sellers come into action and draw the prices down. In the beginning, the highs are higher and the lows lower, but then the situation changes and the highs become lower whilst the lows higher. When you join the lows and highs you will get a diamond shape. It does not necessarily have to be symmetrical. It may be as well tilted on one side.
The diamond top formation may be confused with another pattern that is called the head and shoulders formation. Thus, be careful and analyze the development of the candlesticks thoroughly.
Trading with the diamond top pattern
Let’s consider the example below for the EURUSD currency pair. There is a bearish diamond pattern (diamond top) developed. You should enter the market when the price bar breaks the bottom line of the diamond (the bottom right support line). This breakout confirms the reversal of the trend.
You can yet advantage from the diamond pattern at another point. Though, it will be a good idea to place a stop loss above the last top inside the pattern. If you are trading with Fixed Time Trades open the transaction for a duration of at least 3 times higher than your chart time frame.
How to recognize the diamond bottom formation
The diamond bottom pattern, in opposition to the diamond top, develops at the bottom of the strong downtrend. The bulls and the bears fight with each other, driving the prices up and down. First, the highs are higher and the lows lower. With time, the highs become lower and the lows higher. At last, the price breaks through the resistance line and begins to move upwards. For currency pairs and CFDs use a stop loss just below the last bottom within the formation. For Fixed Time Trades set a duration which should be higher than your chart time frame, e.g. for 5m chart use trade duration from 15 to 30 minutes.
Trading with the use of the diamond bottom pattern
Take a look at the bullish diamond pattern on the exemplary chart below. You should enter a long trade when the price bar breaks through the upper right resistance line.
Pros and Cons of the Diamond Patterns in Trading🎭
- Pros✅:
- They can provide an indication of potential trend reversals.
- Useful in multiple markets including forex, stocks, and commodities.
- Can be used in conjunction with other trading strategies to enhance trading decisions.
- Cons❌:
- They do not appear frequently in charts, making them a less common tool for traders.
- They can sometimes be misidentified with other patterns, like the head and shoulders formation.
- As with all chart patterns, they don’t offer a 100% certainty of market movement.
| Trading Aspect | Consideration |
|---|---|
| Understanding Diamond Patterns | The trader should be able to distinguish between diamond top and bottom patterns and other similar chart patterns. |
| Risk Management | Risk management strategies like stop loss orders should be used in conjunction with diamond patterns to manage potential losses. |
Summary
The diamond formation is not so common. It can be, however, used on its own as it is quite a steady chart pattern. The risk is relatively low in comparison to the reward.
The diamond formation is a trend reversal pattern. It develops with high volume on the top or at the bottom of the trend and predicts the change in the price direction. It is more often created during the uptrend than the downtrend.
Use the Olymp Trade demo account to practice trading with the diamond pattern. This account is free of charge and is powered with virtual cash. This way, you will not risk losing your own money before you get to know how to use the aforementioned pattern in trading.
Once you feel like you know it adequately, you can move on to trading real currency. However, keep in mind that there is no single strategy in existence that will guarantee your profits. You should understand that anything in the financial market will always have a certain amount of risk involved. Be prepared to deal with this fact when trading for real.
Are you familiar with the diamond pattern? Do you have any observations you would like to share? Kindly use the comments section below.
Best of luck!
Questions & Answers🎤
- Q1: How do diamond patterns predict trend reversals?
- A1: Diamond patterns illustrate a battle between buyers and sellers, with price fluctuations creating a diamond shape that precedes a shift in trend direction.
- Q2: How often do diamond patterns appear in trading charts?
- A2: Diamond patterns are not frequent occurrences in trading charts and their formation can take a longer time compared to other patterns.
- Q3: Are diamond patterns applicable to all types of markets?
- A3: Yes, diamond patterns can be applied in multiple markets, including forex, commodities, and stock markets.
- Q4: How can I reduce risk when trading with diamond patterns?
- A4: Using a stop loss order can help manage risk when trading with diamond patterns. It’s also essential to use other technical analysis tools alongside diamond patterns.
- Q5: Can diamond patterns be confused with other patterns?
- A5: Yes, diamond patterns can sometimes be misidentified as other chart patterns, such as the head and shoulders formation.