Depending on their approach, traders can also take advantage of diamond price fluctuations before the price drops. The important thing is to set a tight stop loss at the support level to possibly reduce potential losses. A diamond top pattern doesn’t occur too often, but when it does appear, it can be a sign of a strong reversal in trend on the assets. These chart reversals mostly occur at major highs with high volume and also rarely at market lows.

• The stock chart patterns are ways to visualize a series of price actions that occur over a period of stock trading.
• However, it is still recommended for traders to carry out their testing procedures.
• Still, the profit target will be calculated similarly to the reversal formation.
• When a bullish price action precedes a diamond pattern, it is called a diamond top with bearish overtones.
• Alluding to the rising channel, the model additionally features the subjectivity of trend examination and reversals.

Looking closely at the EUR/USD price chart, the diamond top pattern is clearly outlined. You will observe that the diamond formation begins with the price making a swing low before moving to a higher high. Then to be succeeded by a new swing low and a swing high before finally making the last swing low that precedes the breakout. Trading volume will trend down during the pattern as it develops, showing indecision in the market and lessening demand or supply.

Target

Diamond graphic patterns are sometimes confused with the head and shoulders formation with a V-shaped neckline. They usually occur at the top of the market, although with some similarities between the formations. It can also be identified as an extraordinary model who is casual in nature. Specifically, if after the passing of 50 candles, the price is not triggered either or stoploss or target level, we will immediately exit the trade at the market. Specifically, if after the passing of 50 candles, the price has not triggered either our stoploss or target level, we will immediately exit the trade at the market.

All in all, we have generated a profit equal to 0.15% for less than an hour. However, this time we have added the minimum target of the pattern. The proper location of your stop should be above the last top inside the diamond for bearish setups and below the last low of inside the diamond for bullish setups. As you probably noticed, this is something, which is not present in the previous example where the candle bodies are smaller and the price action is not as volatile. Third, after a while, the situation changes and the peaks become lower and the troughs become higher.

How To Identify And Use The Diamond Pattern In Forex Trading

Diamond reversal patterns are seen across all different types of financial markets including the stock market, forex market, crypto market, and futures markets. The diamond pattern is not seen as often as many other classical chart patterns. However, it is important that you understand the pattern and are able to recognize it, because when it does occur, it can provide for an excellent trading opportunity. As we’re well aware, our diamond strategy is based on a pure price action analysis.

This does not always invalidate the structure’s designation as a diamond pattern. The most important thing is to be able to plot four trendlines that are relatively similar in size around the structure. It’s worth noting that the diamond top pattern can also result in a false breakdown, where the price briefly breaks below the support level before reversing course. To trade the Diamond Top pattern, traders typically wait for the price to break below the support level with a strong volume surge. It’s characterized by a diamond-shaped pattern formed by four converging trendlines, with a horizontal line acting as the resistance level. The peaks and troughs of the trendlines connect to form a diamond shape, hence the name.

Strategy of work using Diamond Bottom pattern in the AUD/USD chart

See that the inverted head and shoulders pattern contains the price action. The false diamond on the right creates sides which are too sharp. This pattern is considered a bullish signal if the price breaks out above the top trendline, and a bearish signal if the price breaks down below the lower trendline.

Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions. The lower trendline represents the support level, where buyers are in control and pushing the price higher. You can identify a Diamond Top pattern by looking for a broadening shape formed by a series of higher highs and lower lows. Because the diamond pattern is rare, can develop into other patterns, and its sideways whipsaw can be downright confusing, the pattern has its limitations. Here are some of the pros, cons, and limitations of the diamond pattern. So, don’t neglect a pattern which is far from being a perfect diamond.

Three Indians pattern: disassembling the 3-touch strategy

Therefore, when you connect these lines, what comes out is a diamond-like pattern that looks as shown above. Our aim is to make our content provide you with a positive ROI from the get-go, without handing over any money for another overpriced course ever again. We are sharing premium-grade trading knowledge to help you unlock your trading potential for free. The key to this is knowing how to measure the chart pattern’s range. Go back to Step 2 and grab the pattern’s range and use that to give you a potential take profit level. Which gives a similar approach to what looks like a slanted head and shoulders pattern.

• This completes the trendlines for the upper section of the bearish diamond formation.
• The pattern represents a period of indecision in the market, where buyers and sellers are evenly matched, but ultimately sellers gain momentum and push the price lower.
• In this step, it is ideal to set an alert at the breakout area (pictured below) so you can be alerted to the recent price action.
• Alternatively, traders may wait for a pullback to the resistance level before entering a short position.

This strategy can be effective in catching potential trend reversals with better entry points and an improved risk-reward ratio. However, there is a risk of a missing trade as the price may keep moving in a breakout direction without a retracement. We have learned that the diamond pattern can have both a bullish and bearish implications.

Bearish Diamond pattern in trading

The second blue arrow equals the size of the first blue arrow, but it is applied over the price action. The green horizontal line indicates the https://forexhero.info/xtrade-forex-broker/ minimum target we should place when we trade this pattern. The moment the price breaks this level, we have the option to exit the trade.