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The diamond chart pattern in Forex is a type of reversal pattern that indicates where the price is likely going to shift in its direction.
Typically, the diamond pattern will occur at the peak or bottom of a trend, which is when you must pay particularly close attention to the price momentum to pinpoint the precise point at which the trend will reverse.
When trading on the financial markets, it is essential to determine where the present trend is likely to stop and where the opposing party will come into play.
Discovering this aspect of market behavior will make it simple for a trader to take advantage of every last drop of profit from a trend.
Therefore, if you are eager to establish a strong trading portfolio in diamond pattern trading, it is vital to have a clear grasp of trend change, where the diamond pattern plays a key part.
So, without further ado, here’s how to trade the diamond chart pattern in Forex and use it to your advantage.
The Diamond Chart Pattern: What Is It?
First things first, you should know that a probable reversal trend is indicated by the diamond pattern because of its distinctive form where the diamond bottom and top varieties are both available.
A rare chart design with a V-shaped neckline that bears a resemblance to a head and shoulders pattern is referred to as a diamond chart formation.
Diamond chart patterns frequently correspond with market peaks.
The major tops are where the Diamond top appears. It shows that price advances to a new high before falling to a support level, rising once more, and finally falling back to a support level to create a new low.
The diamond top is the opposite of the diamond bottom, which develops at the major bottoms. It demonstrates how the price falls to a new low, quickly climbs to a resistance level, falls once more, then rises back to the resistance level, creating a new high.
A B, C, and D are the four points that make up the peaks and troughs of a price in Diamond, respectively.
This gives the design a structure like an inverted V. Following the creation of the top and bottom at point D, the price reverses.
Diamond Top VS. Diamond Bottom And Their Resemblance To The Head And Shoulder Patterns
Diamond top development is more frequent than Diamond bottom development on stock and currency charts.
The top and bottom of the Diamond design resemble the “head and shoulders” and “inverted head and shoulder” patterns, respectively.
The only distinction is that the head and shoulder design is modified by the diamond. The diamond pattern, on the other hand, predicts a trend reversal far sooner than the head and shoulders pattern, thus a trader shouldn’t treat all diamond patterns as head and shoulders.
The diamond occasionally resembles the head and shoulders in certain situations. Diamond, for instance, appears at the top with lots of traffic, which is very uncharacteristic for the head and shoulders pattern.
What Is The Diamond Chart Pattern Used For?
Traders take their long and short bets at point D to implement the diamond pattern. A bullish pattern is represented by the diamond bottom, whilst a bearish pattern is by the diamond top.
With a stop-loss put close to the most recent swing low, traders in the diamond bottom go long at point D. Conversely, traders sell at the diamond top with a stop-loss positioned close to the most recent swing high.
Before making a deal, traders should wait for the pattern to be confirmed. This is so that the diamond may only be used following a breakthrough. There is a danger that the price will move against the trader’s position in breakouts since the price rallies and falls rapidly.
Combining the diamond with technical indicators like moving averages is another way to use it. These technical indicators may be able to weed out any erroneous indications.
Trading Method For Diamond Chart Patterns
The diamond pattern appears on charts infrequently, as was already established. Due to its diamond form, the diamond pattern is visible.
Since it resembles them at first glance, the head and shoulders patterns are a wonderful place to start your search for the diamond pattern. Finding the trend across shorter or longer timescales will help with this.
Visually, the head and shoulders chart pattern and the diamond shape are comparable. In that regard, the inverted head and shoulders chart pattern and the bullish diamond pattern are comparable.
Bearish motifs include head and shoulders and diamond tops. Each enables the trader to short the market or sell it.
Using the diamond bottom or diamond top formation to trade forex is quite straightforward. All you have to do is choose a profitable profit objective, locate your stop loss, and decide on a market entrance. The trade execution procedure is therefore simplified.
The diamond pattern is a potential signal of a price reversal, although it does not show on the charts very frequently.
As a component of an overarching trading strategy, the diamond chart pattern may be used on the charts of your trading platform to assist in the filtering of prospective trade signals.