There are a huge number of chart patterns and copious amounts of chart analyses that professional traders undertake before they execute their position. One of the chart patterns we’re going to look at today is the diamond chart pattern. Some investors and traders may refer to a diamond pattern as a diamond top or a diamond top pattern. If you want to discover how professionals trade diamond patterns, we will explore this in-depth in this article.
If the quote, song title and James Bond film title is to be believed – then “Diamonds are forever”. Unless you’re in the turbulent world of trading, of course. In that case, diamonds can signal something entirely different. It all depends on your risk appetite and how you want to trade.
Is There More Than One Type Of Diamond Chart Pattern?
The diamond pattern is a chart shape that indicates the beginning of a bearish trend or the end of a bullish trend. More often than not, it emerges at the pinnacle of an uptrend. However, this isn’t the only place they form. Many diamond patterns have been known to theme towards uptrends. Many also form near the bottom of bearish trends.
This leads to two specific diamond patterns, bearish and bullish. Bullish diamond pattern trading focuses on identifying when the chart has bottomed out and might signal a price rebound. A bearish diamond pattern indicates the opposite.
What Markets Use This Type Of Pattern?
A diamond trading pattern could form on any chart. All markets where you trade a unit of value or an asset could see this pattern take shape, whether forex, cryptocurrency or stocks. Diamond pattern stocks are a strong indicator and an optimum entry point for some traders who deal primarily on the stock exchange. Whether it is a bullish or bearish indicator, a diamond stock pattern works identically to any other market where the pattern forms.
Some markets are more volatile than others, especially the newest market that has emerged over the last decade – cryptocurrency. This highly volatile asset has proved very lucrative for some early investors, and many believe the market is still in its infancy. There has been plenty of discussion about whether or not central governments and regulators should more heavily regulate the market due to recent high-profile incidents, such as the collapse of FTX.
One of the best ways to avoid some downfalls beginner traders make is to use automated trading software to buy and sell your asset at a predetermined price. This is for several reasons. However, it primarily removes emotions from your trading, which can cause even the most experienced trader to slip up occasionally.
Examples Of A Diamond Chart Pattern
As we touched on at the beginning of the article, the main two types of a diamond pattern chart are bullish and bearish. This section will show you practical examples of both and how you can identify them on a live market to help you further understand what trade you want to make. Studying charts and identifying ideal entry points is known as diamond pattern technical analysis.
Diamond Top Trading Pattern
Irrespective of whether you’re looking to trade the top or bottom of a diamond pattern, there are key characteristics you should look out for. Detailed below is an example of a diamond pattern forex chart. It highlights the uptrend and bearish reversal that crystallises at the peak of the shape. This chart is specific to the USD (United States Dollar) and the JPY (Japanese Yen). This is just one of many key currency pairings when trading foreign currency.
However, this pattern could form a stock diamond pattern if you are looking to trade stocks, and if the stock exchange is your preferred chosen market to execute your trades, you may also see the shape referred to as a diamond top stock pattern.
Bullish Diamond Chart Pattern Trading
As the above analysis highlights, if you enter your trade at the top of the triangle, you’re looking for the asset to depreciate. Some professional traders will use the opportunity to short the asset after identifying the diamond chart pattern. Whilst this isn’t a trading method suited to beginners, it can become advantageous once you know how the market works in more depth.
There are other types of trading we have guides for, such as algorithmic trading or the pros and cons of scalping vs day trading. Bullish and bearish diamond chart patterns are one of the dozens of patterns you can use to execute an effective trade. You can find further guides on chart patterns, such as the evening Doji star and the Fibonacci sequence, which are alternative patterns to the diamond chart pattern we have discussed today.
Will A Diamond Chart Pattern Trade Guarantee Profit?
Whilst using automated trading software and study chart analysis in depth is always beneficial, there is no guarantee that your trade will return a profit. Even with hours of chart analysis and implementing effective trading tools, you could still stand to lose your investment. This is because your capital is always at risk, and you must be aware of market volatility. Just because a market has behaved one way traditionally doesn’t mean it will behave that way in the future, as many factors drive it up and down.
Suppose you are just learning how the market works and trading with a full-time job. Whether you are busy working or caught up doing other things during the day or night, stop loss and take profit limits will allow you to
Even if you set up a trade that you think is guaranteed to make money, you could still find yourself falling short. This is through no fault of your own. Many professional traders lose money despite conducting more than ample market research. Due to the market volatility and the dangers involved whenever you trade, you must be aware that your capital is at risk even with the best due diligence, and you could stand to lose all of your initial investment.
Stocks Diamond Pattern
We appreciate that even though the chart we used showed the difference between two foreign currencies, you may not be familiar with forex and prefer to trade shares on the stock exchange. If you are a trader who would prefer to enter the stock market, a diamond pattern stock takes the same shape and has all the same key signs to look out for when trying to identify the emergence of the pattern.
Although traders debate whether it is more beneficial to trade foreign currency or stocks, both markets are high in liquidity and present less risk than cryptocurrency markets. A stocks diamond pattern could indicate an ideal entry point for a professional trader. If they identify it as a bullish trend, they may use options to maximise their profit. However, this specific form of trading is complex and recommended only for regular professional traders.
Cryptocurrency Diamond Pattern
When trading digital assets, although diamond patterns emerge, you need to approach this particular market more cautiously. Whilst forex and stock markets can be volatile places to conduct any trades, especially in times of a market downturn, cryptocurrency markets regularly dip anywhere between 20-40% in price. It is also heavily driven by Bitcoin’s value, which can pull the market in either direction.
Some traders prefer this volatile atmosphere as it can be a place where traders can make ample profits. However, there are plenty of horror stories involving cryptocurrency investments where traders have lost all of their money in a very short space of time. If you are trading other assets, such as forex or stocks, you could fall into the same position. Ask investors who had money in Northern Rock, Royal Bank of Scotland or Lehman Brothers in 2008 whether they think stocks are less volatile than digital assets.
Cryptocurrencies are far more volatile. Despite exceptions in more traditional markets such as forex and stocks, you’d be hard-pressed to find a market analyst who disagrees with that theory. Irrespective of whether a diamond chart pattern forms, the action that follows it could be much more unpredictable than any other market.
For purists who prefer the rigid structure and regulation of the stocks and forex exchanges, this can provide an adequate safety blanket in the event of a total market capitulation. Some cryptocurrency traders thrive on market volatility and see it as an opportunity to make money. The beauty of it is that once you can use technical analysis diamond pattern identification methods, you can implement your strategy right across the board, across all markets you trade.
Diamond Reversal Pattern
Once the diamond shape forms on the chart and moves in the opposite direction, this is a diamond reversal. Some traders also refer to it as a bullish reversal pattern. We have already detailed this particular diamond chart pattern in the chart we posted earlier. There are many strategies that traders may use when they identify a diamond reversal pattern.
Other trading tools, like options, and opening long and short positions, can help professional or more experienced traders maximise their gains. If the market signs a price correction through a diamond reversal pattern, some traders will look to implement these strategies to execute a successful position.
Options trading can prove preferable for those more assured of their market position or where the market will head. Although these traders might be more experienced, this doesn’t mean their trades will go swimmingly.
Other market factors can drive the price in any direction. Using past analysis might not help traders execute a successful trade. A diamond chart pattern is just one of many patterns that can form throughout a single day. So day and scalp traders would also use this type of technical analysis.
Will A Diamond Chart Pattern Help Me Make Money Short Term?
A diamond chart pattern can form over a short period of trading, say between 15 minutes and 1 hour. Alternatively, if you zoom out of the full chart, you may notice either a diamond top pattern or a diamond reversal pattern that has formed over a few days to a few months.
The short answer to this question is no. No pattern or chart analysis will guarantee you profit over a short period or a long period. Ultimately, the market moves in a malleable and turbulent fashion.
Even though some traders, like scalpers, will execute dozens of trades per day and in an extremely quick fashion, their strategy is short-term. It doesn’t mean they can guarantee a profit in the short term. Some scalpers and other types of day traders can lose all of their money with just one mistimed trade if the markets become highly volatile, which can happen at any moment.
Trading any chart pattern can be tough. To become a full-time professional trader, you must understand chart patterns and other analysis types. It is also important to learn how each market works. Although a diamond chart pattern can form across all financial markets, each market works differently.
For instance, if you are trading cryptocurrency, it is a 24-hour market that doesn’t close. Therefore, depending on the region of the world, you can see huge price action outside of business hours. The same applies to markets such as forex, as the major currency pairs involve the central currencies of the United States, United Kingdom, Canada, Japan, Australia and the Eurozone.
High market activity happens at several different peaks during the day. Conversely, the stock exchange operates during business hours in New York. Throughout the weekend, it is shut. This can greatly impact the type of trade you want to make and how you will go about making it.