Price charts often form repeatable patterns. They are utilised by traders to recognise the best entry points. This article's subject is one of such patterns. It got the name after its shape and is known as a Diamond pattern. It helps to predict the trend reversals.
What is a diamond pattern in trading?
As I have mentioned, the diamond pattern is used to detect the future change in the price direction. It develops on the top of the uptrend or the bottom of the downtrend. It has two variations. One is called the diamond top pattern and the second is the diamond bottom formation.
Identifying the diamond bottom formation
During the downtrend, when the bulls enter the battle, the price moves up and down. When this fight forms higher highs and lower lows, and then lower highs and higher lows, you can sometimes notice the shape of the diamond. This is the diamond bottom formation and it announces an upcoming uptrend.
The shape of the diamond does not have to be ideally symmetrical. It is still valid when the diamond appears tilted to the side.
Using the diamond bottom formation in trading on IQ Option
Below, you will find the exemplary chart for the GBPUSD currency pair. There was a clear downtrend and then the diamond bottom pattern has developed. When the price breaks from the right upper line, which is the resistance, you get a confirmation of the trend reversal. Open a long position here.
Set a stop loss for CFDs and forex below the latest bottom that has formed within the diamond formation. Keep the position open for at least three times longer than the time frame of your chart.
Identifying the diamond top pattern
When there is an uptrend in the price movement, the bulls are in domination. But at some point, the bears begin to pull the price down and you may expect the change in the trend. The highs grow higher and the lows are lower at first. Gradually, the highs grow lower and the lows higher. Connect the highs and the lows of such a fight between bulls and bears and you will receive a diamond-like formation. This is called the diamond top or the bearish diamond pattern.
Analyse carefully the development of the consecutive candles. The diamond top can be mistaken for the head and shoulders pattern. It is not such a big problem though as both formations are signs of a trend reversal.
Using the diamond top formation in trading
Consider the chart beneath. There was the uptrend and on the top, the bearish diamond pattern has formed. The best entry point is when the price breaks the right base of the diamond which is also a dynamic support line. The breakout confirms the trend reversal. The downward movement is usually as long as the height of the diamond.
Use a stop loss for CFDs and forex at the level of the last top inside the diamond. The length of your trade should be at least 3 times as much as the period of the chart you are using.
Chart patterns are of great help when you want to identify the best entry points for your transactions. The diamond pattern does not appear often on the chart but this is the pattern you can use independently. It can bring you relatively good profit with quite a small risk.
Usually, the diamond pattern is observed after a strong price movement. It informs about the fight between bulls and bears which will most probably end up in the change of the trend direction.
IQ Option offers a free demo account and I suggest you practice recognising bullish and bearish diamond patterns there. Once you are confident enough in using the diamond formation, shift to the IQ Option live account.
Do not forget to share your thoughts about the diamond in the comments section which you will find further down below the site.
- Q:What is the main purpose of the diamond pattern in trading?
- A:It is used to detect potential trend reversals and help traders find better entry points for their trades.
- Q:What are the two variations of the diamond pattern?
- A:Diamond top and diamond bottom patterns, indicating bearish and bullish reversals, respectively.
- Q:How can I practice trading with diamond patterns?
- A:Use a demo account to practice identifying and trading with diamond patterns before moving to live trading.
- Q:What is the main drawback of using diamond patterns in trading?
- A:The main drawback is that diamond patterns are relatively rare, making them less frequently applicable in trading.
- Q:What other chart pattern can be confused with the diamond pattern?
- A:The diamond top pattern can sometimes be confused with the head and shoulders pattern. However, both formations are signs of a trend reversal.
GENERAL RISK WARNING
Kindly note that this article does not provide any investment advice. The information presented regarding past events or potential future developments is solely an opinion and cannot be guaranteed as factual, including the provided examples. We caution readers accordingly.
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