Diamond Chart Pattern – Improved Efficient Guide For Trading
The diamond chart pattern is a short-term continuation pattern that can occur on both bullish and bearish trends. Although some traders also employ the diamond top and bottom chart patterns as reversal patterns, Thomas N. Bulowski’s research indicates that these patterns perform better when used as continuation signals.
In bull markets, the diamond chart pattern performs very well, with 69% of targets being met and an average price increase of 27%.
Diamond patterns resemble diamonds and have an upward prior trend for bullish continuation.
Table of Contents
- How To Identify Diamond Chart Pattern
- Performance Matrix for Diamond Pattern
- How To Trade Diamond Chart Pattern
- Best Tips For Trading Diamond Chart Pattern
How To Identify Diamond Chart Pattern
The pattern is identified by swing lows and swing highs, which form in such a way that higher highs and lower lows are followed by lower highs and higher lows, giving this pattern a diamond-like appearance but it does not have to be symmetrical.
Not every pattern has the same appearance, but trendlines have a shape that is similar to a rhombus or a kite.
- Prior Trend
Although diamond patterns can form anywhere in the chart, reliable price action before formation is either an uptrend ( Diamond Top ) or short term downtrend (Diamond Bottom).
- Key Levels
Support and resistance are important factors in the formation of diamond chart patterns; diamond tops are frequently seen forming at resistance levels and diamond bottoms at support levels. This adds another dimension to pattern identification, allowing you to use these key levels in your diamond chart pattern trading strategy.
- Volume Trend
Volume is high at the start of the diamond chart pattern and decreases during the second half of the formation.
- Breakout Direction
Generally for a bullish or bearish continuation the breakout is in the direction of prior trend, however study has shown that the failed breakouts result is short term bullish or bearish reversals
Performance Matrix for Diamond Pattern
Diamond chart pattern performance matrix table is given below to study how diamond chart pattern has performed on various parameters-
|Bull Market Performance||70% continuation, 30% reversal rate|
|Bear Market Performance||63% Continuation, 37% reversal|
|% Gain||27% in uptrend, 33% downtrend|
|Diamond Top breakout pullback %||59%|
|Diamond Bottom breakout pullback %||54%|
|Diamond Top average formation length||46 days|
|Diamond bottom average formation length||54 days|
|Tall pattern performance||31%|
|Narrow pattern performance||29%|
|Wide pattern performance||33%|
How To Trade Diamond Chart Pattern
- Identify the pattern, use identification guidelines given in above section, some diamond patterns look like head and shoulders, to confirm wait for the neckline breakout and trade accordingly.
- Draw nearby support and resistance lines to take important levels into account.
- To calculate the price target use a measured rule and find the height of the diamond chart pattern by measuring the distance of highest high and lowest low.
- For entry wait for breakout, here if there is a resistance level at the highest peak or nearby wait for the level to be tested before placing entry, once breakout is confirmed enter at the closing price of the daily candle.
- For stop loss placement draw a horizontal line connecting two opposite ends of diamond chart pattern from left to right, place a stop loss below this line as per the volatility considerations, if volatility is low use 1 ATR ( average true range) and if volatility is high use 2 ATR below stop loss.
- If support or resistance levels are far and breakout from the pattern is already happened you can enter the trade if risk to reward ratio is at least 1:2 , as measured by the distance of current price and the key level.
Best Tips For Trading Diamond Chart Pattern
- Don’t trade diamond chart pattern if the identification is not very clear.
- Failed breakout should be traded as reversal signals.
- Wait for nearby support and resistance to test before placing a trade.
- Tall patterns have good risk to reward and generally perform better than the short ones
- Avoid trading breakouts with gaps, more often these gaps are filled withing 2 or three days.
- Patterns with light breakout volume perform well.
- Diamond chart patterns during trading range should be avoided.
- If breakout level is also a fibonacci level wait for retest and closely look for a doji / hammer candlestick for a reliable signal before placing entry.
- Diamond chart patterns perform well in both bullish and bearish markets, however diamond tops have higher win rate but diamond tops have good returns.
- Look for other price action trading formations along with diamond chart pattern for extra confluence.