The diamond top and bottom chart patterns are classic reversal patterns used in technical analysis to predict the market’s trend and end. The diamond chart pattern is rarely seen on charts, unlike patterns like flags, pennants, and heads and shoulders, which are more common. The diamond top pattern is a bearish reversal pattern, while the diamond bottom pattern is a bullish reversal pattern, providing powerful signals.
This article will explore the diamond chart patterns and how they are formed. It will also provide practical tips for using them effectively.
The diamond chart pattern is formed when the troughs, peaks, support, and resistance lines (or highs and lows) of an asset connect, forming the shape of a diamond. The pattern occurs when the market’s trend faces exhaustion, followed by a period of consolidation (when the pattern is formed), and transitions into a new trend (when the breakout happens).
The diamond chart pattern is often confused with the head and shoulders and the Quasimodo pattern because they all look similar and are reversal patterns but have a few key differences in price structure.
On the one hand, the head-and-shoulder pattern has a baseline or neckline with three peaks, while the Quasimodo pattern also has three defined peaks of highs and lows. On the other hand, diamond patterns can have several peaks and troughs. Also, the highs and lows do not have a defined neckline. Instead, trendlines connect the peaks and troughs, and traders must wait for the price to break out of the structure before confirming a trend change.
The diamond top pattern is a bearish reversal pattern that forms at the exhaustion of a bullish trend. It forms near market tops after the market has made a series of higher highs and higher lows and trending.
The Diamond Top Pattern
The left shoulder (the highs) begins the consolidation phase and is joined to the head with a trendline (points A to B). The head is then joined to the left shoulder to form another trendline (points B to C), forming the pattern’s upper part, which looks somewhat like an inverted V shape. The bottom part of the pattern is formed by connecting the swing lows to form a V shape (points A, D, and C).
The structure of the diamond top pattern begins from point A, which rallies to a high and retraces lower to point D. The asset rallies to point B, breaking the first high. From point B, the price retraces lower but fails to break the low at point D. It rallies up again but also fails to break the high at point B. Points B to D are usually the longest part of the structure and are often used to measure profit targets. At this stage, there is a high tendency for the price to break out as the diamond top pattern is already completed.
Points A, B, and C form the upper part of the diamond top pattern, while points A, D, and C form the lower part of the pattern. When trendlines connect all these points, they form a diamond shape, hence where the pattern draws its name from.
To identify if a diamond top pattern has been formed, traders should look for the pattern after the market has been bullish and trending, not ranging.
The chart shows a diamond top formation at the consolidation phase after a bullish trend. When the price breaks out of the diamond top, it reverses and turns bearish.
The diamond bottom pattern is a bullish reversal pattern that forms when a bearish trend is about to end. It forms near market bottoms after the asset has made consecutive lower lows.
The trendline connects the lows of the left shoulder to the head, which forms the bottom of the pattern (points A, B, and C), forming a V shape. The upper part of the pattern connects the highs (points A, D, and C), forming an inverted V shape.
Diamond bottom pattern
The diamond structure begins from point A; the price drops low to point B, creating a low before retracing to point D. The price drops low to point B once again but fails to break the low before retracing to point C, ready for breakout.
Points A, B, and C form the bottom of the diamond pattern, while points A, D, and C form the upper part. The diamond bottom pattern is accurately spotted after an asset has been in a bearish trend.
After the diamond bottom formation and breakout after a bearish trend, the price reversed and started a bullish trend.
The diamond patterns can be used to spot potential trend reversals. For example, in the 4H chart below, MANA/USDT had been bullish, creating the diamond top pattern, and the price dropped after.
The chart shows that MANA/USDT reversed into a bearish trend after forming a diamond top pattern after a bullish price.
To get better trade signals, professional traders combine the diamond patterns with other technical momentum indicators and strategies such as the Relative Strength Index (which can indicate overbought or oversold market conditions), breakout and retest, and candle close.
The chart shows an entry strategy combining the diamond top pattern with the breakout and retest strategy. After the price has broken out of the diamond pattern, traders can enter after the retest. Traders can close long trade positions after spotting a diamond top pattern on the chart.
Some aggressive traders prefer to enter immediately after the breakout, while others wait for a candle close after the breakout before taking a trade. Conservative traders prefer to wait for a retest of the breakout, as shown in the chart above, before taking an entry to avoid false breakouts.
No trading strategy generates 100% accurate signals. Traders have the responsibility of managing risk and preserving capital when trading. In some scenarios, the market may continue in its initial trend even after creating a diamond pattern.
Appropriate position sizing and placing protective stop loss orders will help to manage risk. Typically, the profit target for diamond patterns is the length of the most extended portion of the structure, as shown in the image below. Trades can be closed if the price fails to hit this target after 50 candle bars.
The diamond pattern is a powerful technical chart pattern traders can use to take reversal trades. Trading reversals are risky; hence, traders should use appropriate risk management techniques to preserve capital.
The diamond patterns occur rarely and are not easily spotted on the chart, making it difficult for traders to know how it looks to trade off them. However, with proper backtesting and practice, traders can master the pattern and spot them.
The pattern takes a while to form; patience is needed to avoid rushing into trades and getting trapped because of false breakouts. With enough practice and patience, the diamond patterns can be a very profitable trading chart pattern for traders.