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.
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.
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.
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.
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!
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