Chart patterns help traders conduct technical analysis. Some patterns help trends continue, while others reverse them. Patterns generally offer good risk reward ratios and give traders an edge.
Diamond pattern definition
Diamond chart patterns is a reversal pattern that occurs rarely at the tops or the bottoms of trends and reverses them. The pattern is a variant of Head and Shoulders, however, both are traded differently.
Why is understanding the Diamond pattern important for traders?
- Diamond patterns can form rarely but they are very reliable.
- Diamond pattern looks like a Head and Shoulders pattern. However, both have different entry points and it’s important to know the difference in order to trade any of the two effectively.
- Diamond pattern offers a good risk/reward ratio and it’s easy to trade. Furthermore, it is possible to earn greater profits if the market keeps trending in the new direction.
- Diamond patterns can be bullish or bearish and the pattern can be utilized to trade various markets.
Thorough Diamond pattern Explanation
Diamond pattern consists of 3 phases: downtrend or uptrend, consolidation that takes a diamond shape when adding trendlines and breakout to the opposite direction of the trend. As already mentioned, the pattern looks like a Head and Shoulders pattern. The main difference is that Diamond pattern breakout occurs much earlier. Mistaking one pattern with another can be very costly and result in joining the reversal too late, and as a result getting unfavorable risk and reward ratios. To avoid the mistake, let’s take a look at the formations below.
The Diamond Bottom Breakout is an entry signal for going long. Stop Loss target is usually placed beyond the last bottom inside the pattern. The potential Profit Target is as large as the size of the Diamond pattern. Keep in mind that the same trading rules apply for the Diamond top pattern. The only difference is that the shape is inverted.
Now let’s take a look at the inverse Head and Shoulders Pattern. The entry point for this pattern is at the Necklace trendline Breakout. And the potential Take Profit target is as high as the distance between the head and the necklace.
Example of Diamond pattern in Forex
In Forex Diamond chart patterns rarely get shaped. But when they are formed, they are very reliable.
As most chart patterns, it’s best to trade the Diamond pattern on larger than 1 hour time frames to reduce noise. Higher the time frame the better. In addition, it’s important to keep an eye on market news. Chart patterns are great for technical analysis but they don’t take into account fundamentals.
FAQs on Diamond pattern in Trading
How to make a Diamond pattern chart?
Diamond patterns can be seen at the top or bottom of trends. You can use simple trendlines to shape the pattern. Don’t look for the ideal formation, as nothing’s ever ideal in trading. However, make sure the pattern forms Diamond with sharper moves inside the trendlines and not a Head and Shoulders pattern.
How to identify Diamond pattern charts?
Diamond pattern forms at the top or the bottom of a chart and reverses the trend. The pattern is easy to spot as it looks like a diamond when you make trendlines. However, traders should be careful not to mistake the pattern with Head and Shoulders formation as the Diamond pattern is a variation of the Head and Shoulders but has different entry points.