Patterns in trading are things that will help us in reading prices when trading. There are various patterns that can be used in trading. Each pattern certainly has its own advantages and disadvantages. This time we will discuss one of these patterns, namely, Diamond Pattern. Diamond Pattern or diamond pattern is an advanced graphic formation that occurs in the financial market. However, this pattern is less recognized by traders and investors. For those of you who do not understand or still do not know what a diamond pattern is, below we will explore and learn a little about what a diamond pattern is.

Diamond Pattern Definition

Many traders are not familiar with the structure or application of diamond pattern trading. Diamond Pattern is one of the chart patterns. However, unlike flag, pennant, head and shoulders, and rectangle patterns, diamond pattern is less common on price charts. Although there are not many opportunities to trade using diamond pattern, traders should be familiar with this pattern because it can provide solid trading opportunities if recognized early enough.

This diamond chart pattern is often confused with the head and shoulders chart pattern. While there are similarities between the two formations, there are still distinct differences between the two. The diamond pattern most often occurs after a prolonged trending phase. When it occurs in the context of a bullish market, it is referred to as a diamond top, or a bearish diamond pattern due to its bearish implications.

Likewise, when it occurs in a bearish market context, the pattern will be referred to as a diamond bottom or bullish diamond pattern because of its bullish implications. To make it easier, a diamond pattern is a reversal pattern, a triangular diamond pattern, and is one of the most accurate charts in terms of trading. This diamond pattern will only qualify after a breakout. For example, if you want to decide to enter, there must be a breakout first.

The pattern is said to breakout when there is a candlestick whose close body crosses the trendline and exits the diamond pattern. You should not trade if it is still in the formation stage. After the breakout, you can wait for the price to pull back/retest until it touches the trendline and you can enter at that condition. However, when breaking out, the price sometimes experiences a very rapid increase and decrease without any pullback.

So that is one of the things that need to be considered if you want to trade using the diamond pattern. The best entry position in this pattern is when the market price has penetrated the diamond and closed outside the diamond. You also have to place a stop loss so that your account is protected from very large losses. While the buy signal if the breakout is above the trendline, and vice versa the sell signal when the breakout is below the trendline.

Diamond Pattern Trends and Reversals

Technical analysis usually involves trying to identify a defined trend and its subsequent reversal as these patterns usually provide the most profitable trading signals. Uptrends and downtrends usually include some standard patterns that help make the trend easier to recognize. Most trends will start with a breakout gap and be followed by several runaway gaps as price follows the trend. Traders will use different types of envelope channels by setting top and bottom boundaries around the trend in order to understand the volatility range of a security’s price and potential reversal points.

Since the price of a security generally oscillates over time, the channel boundaries can be a good tool to provide an indication of points where a reversal may occur. When the diamond top formation is combined with a price oscillator, the trade becomes a great catch. The price oscillator will increase the probability of a profitable trade overall by measuring price momentum and confirming weakness and weeding out false breakout/breakdown trades.

Reversal Signal on Diamond Top

Diamond tops usually form at the end of an uptrend, making them a strong signal for a reversal. Typically, this pattern will look similar to an off-center head and shoulders pattern or a flattened double top pattern. Traders who identify a potential diamond top will look to draw a trendline around the pattern that forms the diamond shape. The pattern must continue to trade within the trendline boundaries to be classified as a diamond top. If price action remains within the boundaries, the trendline can provide isolated resistance and support levels that can help traders trade the reversal.

The diamond top reversal pattern is one of several reversal patterns that can help a trader determine the price momentum of a security at its resistance level. Typically, most technical traders will look to identify a strong technical pattern such as a diamond top reversal at a security's resistance level before betting on a security's price movement. If a diamond top reversal is detected, then the trader will likely sell, or short, to profit and form a new downtrend.

Diamond Pattern Characteristics

The characteristics of the diamond pattern itself are that there is a diamond pattern structure that is divided into two parts, namely a divergent triangle on the left and a symmetrical triangle on the right. The two triangles share a base so that it looks like a rhombus or diamond. However, in some cases, it is sometimes more similar to a tarpezium, but the signal is still strong. In addition, there is a candle reversal pattern that can help you track the formation of the sides of the diamond during formation. Long candles also indicate that the pattern is moving towards its completion. Next is the volume. If the trading volume in the market grows, then the chances of a breakout will increase soon. This is a strong confirmation of your signal. There is also an oscillator as a standard confirmation of each reversal pattern. Wait for the price to exit the overbought and oversold zones. Depending on the type of diamond to confirm the trend change. For its shape, the pattern looks like a rhombus on the chart, but is sometimes misinterpreted as a head and shoulder pattern. Diamond patterns are also not always symmetrical rhombuses. This diamond pattern also has reversal characteristics, namely the bullish diamond pattern (diamond bottom) and also the bearish diamond pattern (diamond top). In addition, most diamond top formations will show the following main characteristics:
  1. Securities prices tend to rise.
  2. Price action will then begin to resemble a broadening pattern, where the highs are higher and the troughs are lower initially.
  3. Next the price action changes to a place of lower highs and higher lows.
  4. Connecting the peaks and troughs will form a diamond, usually slanted to one side.
The diamond top formation will only occur at the end of an uptrend while its counterpart, the diamond bottom formation, occurs at the end of a downtrend. The diamond top formation can be confused with the more popular and more powerful head and shoulders formation.

Diamond Pattern Types

There are types of Diamond Patterns that you can use as a reference in recognizing the diamond pattern. This diamond is most often present as a trend continuation, which makes it likely to go down if the pattern is seen going down before, and vice versa. If the price goes up, the diamond pattern will continue the previous pattern. Both of these are commonly referred to as diamond top and diamond bottom.

Diamond Top

Diamond Top is a chart pattern that occurs during an uptrend. At this diamond top, the price range will get bigger and then smaller. This is like an ascending triangle and a descending triangle combined into one. This diamond top is a rare chart pattern. Diamond top can be a continuation pattern or a reversal pattern. According to Thomas Bulkowski, although it has the potential to continue the trend by 31%, the possibility of a reversal still occurs, which is 69%. The target price at this diamond top is the same as the height of the diamond top itself. After the breakout, the target price is the same as the height of the diamond top. Which price will eventually reach the target of the diamond top.

Diamond Bottom

While the diamond bottom is the opposite of the diamond top. The shape will be exactly the same, but the difference is that this chart pattern will occur during a downtrend. Just like the diamond top, this diamond top has a large percentage of reversal of 61% rather than a continuation pattern which has a percentage of 39%.

Identifying Diamond Patterns in Trading

The diamond chart pattern in this form of trading has two combinations of chart patterns, namely the widening pattern and the inside pattern. In phase 1, the market will form a widening pattern like starting from one point and continuing to widen over time. In this phase it is called the Broadening Pattern. Furthermore, in phase 2, namely the Narrowing Wedge / Inside Bar, namely the squeezed narrowing will form like starting from a wide wave to one point. This is the opposite of the widening pattern. After combining phases 1 and 2, a diamond pattern will form. This is an ideal way to identify chart patterns in trading with technical analysis methods.

Trading Strategy Using Diamond Pattern on Forex

The best strategy when using diamond pattern in forex is when using breakout trading. The best entry position in this pattern is after the market price breaks through the diamond and closes outside the diamond. Buy signal if the breakout is above the trendline, and vice versa sell signal when the breakout is below the trendline. After the breakout, you have to wait until the price pulls back/retests until it touches the trendline and you can enter in that condition.

The TP target is usually the same length as the inside of the diamond. You can measure it with the crosshair tool or the line. Don't forget to place your stop loss to protect your account from big losses. In addition, you should pay attention to things like confirming the diamond pattern by finding a relatively large trading volume. Also, make sure the pattern is more horizontal, and not vertical. If the shape is more vertical than horizontal, then you may be looking at a head and shoulder pattern chart.

You should sell when the price breaks the lower right side of the diamond, and do not trade when it is still in the diamond pattern formation stage. Trade after receiving the last signal. And finally, place a stop loss order above the last peak inside the diamond shape on the chart. Trading strategies consist of many confluences that add up and then form high probability setups. One chart pattern is not the only strategy, but there are several strategies that filter the best setups from many things. As in the strategy there are, risk-reward, risk management, which are followed correctly. In addition to the above strategies, there are also strategies like the ones below.
  • To filter the best patterns from the crowd, use trend filters (formation of higher highs/lower lows/200 period moving average)
  • Adjust the stop loss above the first lower high after the maximum swing high in the case of a diamond top. On the other hand, place the stop loss below the first lower high after the maximum swing low in the case of a diamond bottom.
  • Split the take profit level in half. Close part of the trade at TP level 1 (discussed above). Then multiply the distance between the high and low by 1.618. TP level 2 will be at this level. For example, if TP1 is at 100 pips then TP2 will be at 161 pips (100*1.618). 1.618 is the Fibonacci golden ratio and has been tried and tested to increase the risk reward ratio of this trade setup.

How to Trade Using Diamond Pattern

To trade chart patterns, there are three parameters (entry, stop loss, take profit) that will be measured, namely:
  1. Entry. Entry trading will occur right after the breakout of the diamond pattern with a large candle. You can sell the security at the close of the large bearish breakout candlestick in the case of a diamond top. At the time of entry, you can also buy the security at the close of the large bullish breakout candlestick in the case of a diamond bottom.
  2. Stop loss. You can place the stop loss above the top of the diamond and keep it below the bottom of the diamond.
  3. Take profit. The take profit level is projected based on the difference in distance between the low and high of the diamond chart pattern. For example, if the distance between the low and high is 100 pips, then the take profit level will be 100 pips away from the diamond pattern breakout.
Also keep in mind that this diamond pattern is very rare in trading, which is why you will rarely find it on higher time frames. You can trade it intraday and for scalping on lower time frames. You should be careful not to make the mistake of misidentifying the diamond top which usually occurs before the head and shoulders reversal pattern.

Misidentifying this can cause traders to short the market or cut your trading time before the time you have set. Top and Bottom diamonds can also be generally compared to double tops and bottoms. but they tend to have less distinctive highs and lows. Thus the discussion from GICTrade regarding the explanation of "Diamond Pattern: Definition, Strategy, and How to Trade". You can also find out other information about trading, investment, and other financial trivia, such as BRI Transfer Limits and "Tips for Making Stock and Forex Trading Plans" only in the GIC Journal. Make sure you also deepen your forex knowledge at GICTrade, via scalping ebooks, and also NFP live trading. And don't forget to download the GIC Mobile Apps on the Google Play Store and Apple App Store.