The definition of Diamond Pattern
The diamond chart pattern is a reversal indicator usually used to detect trend reversals. It's quite a rare pattern that forms a diamond on the chart, and it can generally be found at the top during an uptrend or at the bottom during a bearish market phase. So, today we will cover the following topics:
- What is the diamond pattern in fx?
- How can you identify it?
- The difference between bearish and bullish diamond chart patterns.
- Advantages and disadvantages of using a diamond pattern in Forex trading.
- How to choose entry points for trading this reversal pattern?
Structure of Diamond
The pattern has two parts:
- Divergent triangle on the left
- Symmetrical triangle on the right
Two triangles share the base so they look like a rhombus or diamond. Hence the name.
It is worth remembering that the Diamond won’t necessarily be symmetrical on all sides. In some cases, it looks more like a trapezoid, but the signal remains strong.
The diamond, like many other reversal patterns, is of two types:
- Bearish - appears at the top of an uptrend and signals further downtrend.
- A bullish diamond is formed at the bottom of a downtrend and indicates an upward reversal.
In both cases, the pattern looks exactly the same. The type of pattern depends on the trend after which it was formed.
Sometimes you can also catch a diamond continuation pattern. Most rhombus-shaped figures are reversals, but it may happen that the price will break out of consolidation in the trend direction. That's why you should remember about stop-loss orders, but diamond patterns take much time to develop, so traders have enough time to use indicators and tools to keep the situation under control.
Using Diamond in Trading
Diamond formation refers to classic chart patterns, but as I mentioned before, you can find it as often as head and shoulders, triangles, and other familiar figures. However, the diamond pattern is an excellent opportunity to earn because the breakdown is impulsive enough.
If you caught the pattern during its formation then it is better to avoid trading for now. It is best to open a trade after receiving the final signal. To do this, you need to wait until the end of the formation of the symmetrical triangle. When the price breaks through one of its sides, open a trade:
- If the Diamond is at the top, then after breakout to the downside open a short trade
- If the figure forms at the bottom, open a long trade after a breakout to the upside
Let's take a closer look at the example below. It shows how a divergent triangle forms after an active downtrend. Then comes the symmetrical triangle. The price breaks through its upper side, giving a signal to open a long trade, and continues to move upwards.
Diamond Figure
Note that the Diamond, like the triangles, gives quite strong impulses. That is why, after breaking through one of the sides of the pattern, the price rarely returns for retesting.
Remember that the Diamond gives the strongest signals on high timeframes - H1, H4, D1. On low timeframes, the signal is often false. Be careful.
Useful Tools
You can use the following additional tools to confirm the formation of the Diamond and the main trading signal:
- Japanese candles. Reversal candlestick patterns help you track the formation of the sides of the Diamond during formation. The appearance of long candlesticks indicates that the pattern is moving towards its completion.
- Tracking the volume. If the trading volume in the market grows, then the chance of a soon breakout also increases. This provides a reliable confirmation of your signal.
- Oscillators. Standard confirmation of any reversal pattern. Wait for the price to move out of the overbought or oversold zone, depending on the type of the Diamond, to confirm the trend change.
Diamonds Trading Pattern Vs. The Head And Shoulders
Diamond is a unique pattern that sometimes reminds of a head and shoulders formation, and newbie traders can confuse them. However, some differences can help you to understand which type of pattern you are dealing with.
- The head and shoulders always consist of three peaks. The middle is the highest, while the shoulders are on the same level. Remember that diamond patterns have several peaks, and it's formation is more symmetrical than the head and shoulders.
- The neckline is a fundamental part of the head and shoulders pattern. You can not draw the neckline on the diamond figure because its lows or highs are not situated in the same line.
Pros and Cons of Using Diamond Pattern
All trading patterns have advantages and disadvantages. Let's take a closer look at diamonds' benefits:
- Diamond can be found on all timeframes and all fx currency pairs;
- Traders can use it for both bearish and bullish market phases;
- It works well with reversal trading strategies.
The major disadvantages are:
- It can be not easy to recognize;
- This pattern is quite rare;
- May produce incorrect signals;
- Effective on more extended time frames.
That's all you need to know about the Diamond. It doesn't appear very often on the chart. However, if you caught it at the moment of formation or breakout, do not miss the chance to open a trade.
Frequently Asked Questions (FAQs)
Is diamond formation worth trading at any timeframe?
You can trade rhombus shape patterns at any frame, but longer timeframes give solid signals if compared with shorter ones.
Is diamond bottom more accurate than diamond top?
Both patterns have the same signal accuracy, and it's highly recommended to use other indicators to confirm reversal or continuation.
Are diamond figures reliable reversal indicators?
Yes, but ensure you use a risk management system, as there are no 100% reliable patterns.
Do diamond patterns work in other financial markets?
A diamond formation can be used in crypto, stocks, and other markets. Before trading this pattern, make sure you trade a well-known instrument.