Diamond Pattern
The diamond pattern is a relatively complex chart formation. It is considered a strong reversal pattern. Its formation must be preceded by a prior price movement, and the diamond itself appears near the end of that move. The pattern can form during both bullish and bearish trends.On the chart, the diamond pattern can be seen as roughly two halves. The left side of the pattern represents an expanding price range (which can be described as an expanding triangle), while the right side represents a contracting price range. Therefore, if an expanding range is forming on the chart, it is always worth considering that it may eventually develop into a diamond pattern. Perfect symmetry is relatively rare in this pattern, as the price range may expand or contract unevenly.
How to Trade the Diamond Pattern
It is best to refrain from trading until the diamond pattern has fully formed and wait for the price to break out of the completed formation.If the diamond forms during an uptrend, a downward price reversal can be expected. If it forms during a downtrend, an upward reversal is more likely. Therefore, it is important to observe the direction in which the price breaks out of the diamond.
The trading method involves waiting for the price to break out of the diamond and then either:
- Entering the trade immediately if you can determine that the breakout is genuine, or
- Waiting for a pullback and opening the trade in the direction of the breakout.
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