The diamond chart pattern is a rare and relatively complex pattern that appears in the price charts of financial assets such as stocks, currencies, and commodities. It is considered a reversal pattern, meaning that it signals a potential change in the direction of the asset’s price trend.
The pattern consists of four distinct price movements:
- The first top: This is the first peak in the price trend, followed by a dip.
- The second top: This is the second peak in the price trend, which is usually higher than the first top. It is followed by a dip.
- The third top: This is the third peak in the price trend, which is usually lower than the second top. It is followed by a dip.
- The fourth top: This is the fourth peak in the price trend, which is usually lower than the third top. It is followed by a dip.
The diamond chart pattern is completed when the price breaks above the resistance level, which is the high point of the fourth top. This break is considered a buy signal, as it suggests that the price trend may be reversing and heading upward.
It’s important to note that the diamond chart pattern is not always a reliable indicator of a price trend reversal. It’s always a good idea to use other technical and fundamental analysis tools to confirm any potential trade signals generated by the diamond chart pattern.
How do you trade diamond chart patterns?
The diamond pattern typically appears during a prolonged trend period. As the price reverses and starts moving downward after this pattern in a bull market, the pattern is known as a diamond top or a bearish diamond pattern. When a diamond happens in a bear market, the pattern is known as a bullish diamond pattern or a diamond bottom because it has a positive implication.
The diamond chart pattern takes a long time to produce, which is why it is so uncommon. It should first create the support and resistance lines, diverge almost sharply from the horizontal lines, and then converge once more into a single structure. The final shape is that of a diamond. That is how the name came to be.
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