What is diamond pattern and how to trade it?

What is the diamond pattern? It is a good strategy for trading breakouts, retracements, and continuation patterns.

The diamond pattern is created by two swing highs followed by two lower lows. What makes this pattern so unique is that we can trade it in both bullish and bearish markets.

In this article, we will talk about diamond patterns and how to spot them. Diamonds are a strategy that we can use in the market, but there is more than one way it should work out for you! 

We’ll go over some tips on trading with diamonds as well as risks associated if you decide to try their luck at investing or futures trading.

A diamond pattern is a sophisticated chart formation employed in the financial market for identifying reversals.

Many forex traders have long used basic price patterns to predict profitable trading possibilities and explain basic market tactics.

This article explains everything there is to know about diamond chart patterns, stock, and trading tactics.

What is a Diamond Pattern

Many traders are using the diamond pattern, which is a popular technical indicator. This an important introduction to price pattern by Investopedia.

It’s one of the most common trading techniques for identifying profitable reversal patterns. It typically occurs after a long trend phase.

The diamond pattern is seen on any time frame and is characterized by two parallel trend lines with two highs and two lows between them.

The higher high should follow or near the lower low, which implies four price levels in the formation.

Diamond pattern on Eurusd november exampe chart

The top of a significant uptrend is where the diamond top appears most. It works well to signal impending shortages and retracements with relative precision and ease.

Finding a diamond pattern is more difficult in the stock market than in the foreign exchange market because of price gaps. Diamond patterns are not easy to find.

When a symmetrical triangle forms in a bullish market, it is a diamond top or a bearish diamond pattern.

On the other hand, a bottom is a reversal signal that occurs within the context of a bearish market.

You can use any time frame, especially daily and hourly charts, with this setup.

Why people loves use Diamond pattern

The diamond pattern is a type of chart pattern that traders look for to predict future price direction. The psychology behind the diamond pattern trading strategy is that people are typically looking for patterns to tell them what will happen next. 

The diamond pattern trades on investor psychology, as there are many sorts of forms. This form is concerned with how stock prices change in various ways and can forecast their changes before they happen.

After a big rally, investors want to take profits or go short bullish.

This may result in consolidation. Consequently, there is a period of uncertainty that investors can profit from because of some volumes. Another merger that destabilizes the price occurs after the pullback.

When investors capitalize on the market’s present state, the final breakout occurs.

How to draw the diamond pattern with 3 steps

The technician will look at the lowest trough formed in the formation to establish lower trendline support. We may find bottom-side support by connecting the bottom tail to the left shoulder (line C) and then linking a support trendline from the tail to the right shoulder (line D).

We connect the bottom right angle to the top of the design by completing it. The rightmost angle of the formation, which resembles the apex of a symmetrical triangle pattern, is intriguing.

Learn how to trade the diamond pattern

We think it is not easy to start diamond pattern trading. Because the form requires a keen eye and continual practice, it’s not simple.

A rising or falling trend often confuses traders as to when to enter or exit a position. As a result, you’ll need a thorough and accurate technique for recognizing this pattern.

On the other hand, unusual patterns frequently break down or up, whether they’re bullish or bearish.

Trading a diamond top is no more complicated than trading other formations. Simply looking for a break of the lower support line indicates increasing momentum, suggesting a potential shortfall.

The upper resistance and lower support levels of the right shoulder will capture price movement as each new session’s range shrinks. This means that a short-term breakout is possible.

A breakout from a pattern is not as complicated as trading other formations.

This is a continuation of the sell signal. Once a session falls below the support level, selling momentum will continue because sellers have finally pushed the close below this critical threshold.

If the price drops, a trader will want to buy right away. They might want to buy at the level where it fell.

How to use support and resistance with Diamond

This method is good when the price changes quickly. It is very good when there are levels of support or resistance.

If the price of the stock goes up high enough, you can stop trading and close your trade. If it is a false break and a temporary retracement, you might lose money.

Trading chart patterns are frequent. This means the price action is usually in this shape. Stock breakouts and reversals are two examples of this.

diamond and support and resistance in shiba inu cryptocurrency chart october

Recognizing these chart patterns can help you gain a competitive edge in the market. It’s critical to learn about the many sorts of trading charts available.

Don’t begin a chart pattern analysis unless you’re confident in your conclusions. The price break above the diamond’s base, which is also a dynamic support line, is an excellent beginning point. As a result, this breakout concludes that the trend reversal has occurred.

Another thing to consider about diamond pattern trading is not to trade against it until it establishes a solid break. The trend may be bearish, but the break may also be bullish, or vice versa. As a result, every diamond pattern trader must first understand the fundamentals of the technique.

The profit goal is the size of the formation minus the head to tail.

Tips for bullish diamond

In the diamond bottoms pattern, the price usually rises quickly and then falls suddenly. The compensating feature of the diamond bottoms pattern

The breakout of the diamond occurs when the price passes through the lower right side downward sloping trend line.

Take profits: Take the distance between the highest and lowest points in the diamond formation, plus it to the breakout point, to determine the breakout potential for a diamond formation.

If the price of something falls below the line in a diamond chart, it might go up. But if the price is above the line in a diamond chart, it could make it much higher.

Stop Loss: A stop-loss is a price where you sell. If the price goes lower than the stop-loss, then you can sell it.

Tips for bearish diamond

When the price for diamonds goes down, it becomes cheaper. When that happens, people will buy more diamonds. That is because they are less expensive.

Take a profit: To find out how far a diamond formation’s breakout potential extends, add the distance between the highest and lowest points in the diamond formation to the breakdown point.

However, a breakdown from the diamond chart formation will result in even more losses in most situations.

Stop Loss: A swing high before the breakdown is a stop loss for short trades.

The most common mistake is buying too soon

The most common blunder a trader can make is to buy diamonds too soon. Make sure you draw support resistance lines and consider the diamond’s second half as a symmetrical triangle.

When the price breaks above or below either barrier, it sends signals about the price’s future direction.

Another problem with the diamond trade is setting price objectives and stopping losses. There is no way to measure how far a diamond’s break will go.

The most common blunder for traders is buying diamonds too soon.

This is because many speculators are sometimes overly cautious in terms of benchmarking.

Traders frequently calculate the difference between the high and low points and then add it to the breakout.

Because of this, the ideal approach is to analyze the beginning drop that started the diamond to predict where the correction will bottom.

Diamond Chart Pattern vs Head and Shoulders

The diamond chart formations are frequently confused with the head and shoulders chart pattern, which features a v-shaped neckline.

The most common bottoms are those at the market tops, although they do have certain similarities. It can also be described as a rare pattern that is occasional in occurrence.

The diamond chart formations differences with the head and shoulders chart pattern

First, draw a figure on the chart. Draw two lines that look like peaks and troughs.

Reversals are most common at significant tops, although they can also occur near market bottoms.

The breakout from a pattern is particularly common around significant tops and with high-volume. A breakout from pattern formation, on the other hand, might lead to stock gains.

On the other hand, the diamond chart pattern is less prevalent than conventional pennant, head and shoulders, flags, and rectangle patterns on price charts.

A breakout from a pattern is common when the price hits significant highs lows with high volume

The thinking is that before the expected deficit, the price action consolidates. An area of the chart that is above the trendline will make the pattern not work.

The trader has to think about whether or not they should use a trendline that starts from the head and goes to the right shoulder. They have to decide if they should ignore it since it is broken.

Summary

When you want to identify the best entry points for your trades, chart patterns make them more accessible. Independently, It can yield you good profit with quite a small risk. 

It is rare to find the diamond shape on the chart. Also, try verifying if it is there after a big price movement.

Often, most diamond chart reversals occur at significant tops and with high volume rarely at market bottoms. 

You can notice diamond bottoms in a bull market with an upward breakout. In contrast, for overall performance, those in a bear market always come second.