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Diamond Pattern Trading: All You Need To Know

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Written by Timothy Sykes
Updated 9/17/2023 20 min read

Diamond pattern trading is the strategy traders use to trade these rare trend reversal patterns. The diamond chart pattern is actually two patterns — diamond tops and diamond patterns. These patterns form on a chart at or near the peaks or valleys of a move, their sharp reversals forming the shape of a diamond.

Trading is not about gut feelings or lucky guesses. It’s about patterns and understanding price action.

The great thing about these patterns is they never change.

I’ve been trading the same patterns for over 20 years. Combined they’ve helped me rake in more than $7.4 million in trading profits.

The reason they don’t change is because they’re based on human emotion. And humans always react predictably during times of high stress and greed.

If you see the diamond pattern forming on a hot stock, start paying attention. Things are about to get interesting.

Table of Contents

What Is Diamond Pattern Trading?

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Think of a diamond pattern as a map of the market’s mood. It’s a chart formation that takes the shape of a diamond.

It’s more than just lines and points, it’s a valuable tool that signals potential reversals in price trends. Diamond pattern trading involves leveraging these formations to make informed decisions on when to enter or exit trades.

Key Characteristics of the Diamond Pattern Trading

In diamond pattern trading, your canvas is the price chart, and the paint is the price action.

The diamond chart pattern stands out for its clarity. Its peaks and troughs — formed by price highs and lows—present in a diamond shape. That’s what gives the figure its name.

Within this formation, you’ll notice trendlines diverging and converging, encapsulating the price. A diamond pattern is an omen of a potential market shift.

As traders, we don’t predict — we react. And this pattern is our signal to gear up and act.

I’m especially prepared when it comes to Friday trading. That’s where we see the week’s biggest spikers.

I’ve even got a specific pattern I use every Friday to capitalize on the intense volatility.

Check my favorite Friday strategy.

It all comes down to key trends in the market …

Trends and Reversals

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In trading, the trend is your friend, until it ends.

The diamond pattern is a beast at identifying possible ends of trend lines. Picture an uptrend or downtrend starting to lose steam, making higher highs and lower lows, like the shoulders of a giant.

This price action consolidates to form the diamond shape. The breakout from this pattern signals a trend reversal. The specific kind of consolidation heavily influences the pattern’s end products.

Keep reading …

Conditions for and Principles of the Diamond Chart Formation

A diamond formation isn’t just any random consolidation phase.

It’s a specific structure marked by a broadening pattern (formed by peaks and troughs) followed by a symmetrical triangle.

So, we’re looking at two trend lines that diverge and then converge, shaping like a diamond. Spotting it requires sharp eyes, but it pays off.

Importance of Diamond Chart Pattern

Why all this fuss about diamond patterns?

They are priceless. Diamond patterns provide early warning signs of significant trend reversals, acting as indicators of exciting trading opportunities.

By interpreting them correctly, you can anticipate potential price moves, minimize risks, and max out gains.

But only if the data you’re watching is up to date.

Stocks spend the whole day whipsawing up and down, taking rights and lefts seemingly without warning. Patterns help us map and trade these movements, but we need to be on time.

And your free Robinhood software won’t cut it. That data is 10 – 20 minutes late.

Anyone serious about trading needs to upgrade their tools. I use StocksToTrade because it’s designed specifically for small account traders.

StocksToTrade is a powerful trading platform that integrates with most major brokers. I helped to design it, which means it has all the trading indicators, dynamic charts, and stock screening capabilities that traders like me look for in a platform.

Grab your 14-day StocksToTrade trial today — it’s only $7!

A trader is only as good as their tools.

Types of Diamond Pattern Trading

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This is key information, diamond pattern trading isn’t one-size-fits-all.

It comes in two flavors: the bullish diamond pattern and the bearish diamond pattern. The bullish type signals a change from a downtrend to an uptrend and vice versa for the bearish type.

Knowing the difference between these cases is crucial—this isn’t a game, it’s a strategy. Understand the type of diamond pattern, and you’ll know which direction to trade. Good performance as a trader starts with a high level of understanding.

While the diamond pattern is a significant tool in technical analysis, it’s essential to understand the broader context of trading strategies.

For instance, the ascending wedge is another pattern that traders often look for. It’s a pattern that can indicate either a continuation or a reversal, depending on the market context.

Understanding these different patterns can help you become a more versatile trader. For more insights into different trading patterns, consider exploring our guide on the ascending wedge.

Bullish Diamond Pattern

Hold on tight, a bullish diamond pattern happens during a downtrend.

Here’s what the setup looks like, after a series of lower highs and lower lows forming a diamond, a bullish breakout can occur. This change in direction indicates the possibility of a rise. It’s the market’s version of a phoenix rising from the ashes.

Bearish Diamond Pattern

Opposite to the bullish pattern, a bearish diamond pattern forms during an uptrend.

Highs and lows widen, then start to consolidate, forming our diamond shape. When prices break downward, it’s a signal that the uptrend could be ending.

A bearish diamond pattern is like a stop sign to traders riding the uptrend wave.

Understanding Diamond Pattern Trading Top and Bottom Formations

The diamond top and bottom structures are significant parts of the trading equation.

The diamond top structure signals the end of an uptrend, hinting at a potential downturn. In contrast, the diamond bottom structure appears after a downtrend and indicates a possible price rise.

But it’s also essential to use these patterns on highly volatile stocks. I’m not trading every diamond pattern I see. I wait for the best spikers.

Watch the video below to prepare for the next runners …

By understanding these formations, you equip yourself with the knowledge to trade effectively, capitalizing on reversals.

The diamond pattern is just one of many patterns that traders use to make decisions.

Another popular pattern is the cup and handle, which is often seen as a bullish signal.

It’s crucial to understand how these patterns work and how they can be used in conjunction with other patterns and indicators. To deepen your understanding of these patterns, check out our detailed guide on the cup and handle pattern linked above.

Trading the Diamond Top Structure

Diamond tops can be a trader’s best friend if understood right.

Picture an uptrend leading into wider price swings. This volatility narrows down forming a diamond top pattern.

If prices break downward after the diamond, it’s a signal that the uptrend may have run its course. It’s time to adjust your trading strategies.

Trading the Diamond Bottom Structure

Trading the diamond bottom structure is akin to catching a falling knife, except you’ve got a handle to grab onto.

It’s a diamond pattern that forms at the end of a downtrend.

When prices rise following the diamond, it signals a potential reversal from bearish to bullish. If you spot it right, it’s a potential profit party.

What Is a Diamond Continuation Pattern?

Don’t be fooled, diamonds don’t always mean reversals.

A diamond continuation pattern happens when the price action takes the diamond shape but continues in the initial trend direction post-formation. It’s like a breather before the price action resumes its original path.

It’s a plot twist in the story of diamond pattern trading, one you need to watch out for.

Best Diamond Pattern Trading Strategy Approach

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Strategizing is vital in diamond pattern trading. You must know when to enter the market, how to manage your risks with stop losses, and where to set your profit targets.

A confirmed breakout is your starting gun, signaling the time to enter the market. A stop loss keeps your risk tight—remember, we’re here to trade another day. Your profit target is your finish line, guiding your trading journey toward a successful end.

While the diamond pattern can provide valuable insights, it’s just one piece of the puzzle.

Another pattern that traders often look for is the triple bottom pattern. This pattern can signal a reversal of a downtrend, making it a potentially valuable tool for traders.

To learn more about how to incorporate this and other patterns into your trading strategy, take a look at our comprehensive guide on the triple bottom pattern linked above.

Market Entry

Knowing when to step into the trading floor is crucial. And this goes for any strategy.

Take a look at the video below for another example of entry importance …

In diamond pattern trading, market entry is usually determined by the breakout direction. For a bullish diamond, you’d enter a buy order once the price breaks above the diamond.

For a bearish diamond, a sell order is placed when prices drop below the diamond. Remember, timing is everything.

Stop Loss

Let’s talk risk management.

Placing a stop loss is not a suggestion, it’s a rule.

All trade strategies come with certain disadvantages. Trading is inherently risky. Stop losses help mitigate the disadvantages.

For diamond pattern trades, stop losses are typically set just outside the diamond formation. This protects your account from significant losses if the price action pulls a fast one and the expected reversal doesn’t happen.

Profit Target

Setting a profit target is like drawing a finish line for your trade.

After entering a diamond pattern trade, your profit target is usually the height of the diamond added or subtracted from the breakout point. This way, you’ve got a clear vision of where you’re headed before hitting the gas pedal.

The Applicability of Diamond Patterns in Different Markets and Timeframes

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Diamond patterns are a jack-of-all-trades—they are applicable across different markets and timeframes.

Whether you’re analyzing the forex market, scrutinizing stocks, or charting crypto, the diamond pattern can be a valuable tool in your trading arsenal.

And this isn’t a one-time-frame show. Be you a day trader or a swing trader; diamond patterns can signal trading opportunities for all.

Do Diamond Patterns Work in Crypto?

Absolutely.

Diamond patterns are not exclusive to the stock market or forex trading.

They’re applicable to any asset that exhibits price action, including cryptocurrencies. The rules of the game remain the same. Spot the pattern, check the breakout direction, and trade accordingly.

Can I Trade Diamond Patterns in Any Timeframe?

Short answer: Yes. Diamond patterns can form over various timeframes, from 1-minute charts to weekly or monthly frames.

But remember, longer timeframes can offer more reliable signals since they absorb more data. Yet, the key is to find what works best for your trading strategy.

Evaluating the Efficacy and Reliability of Diamond Patterns

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Diamond patterns are known for their reliability in signaling trend reversals, but don’t take them as gospel.

They are a tool — one of many in a trader’s toolkit.

Their efficacy lies in how they are interpreted and applied. Neither diamond tops nor bottoms hold a monopoly on accuracy — it’s the trader’s skill and understanding that makes the real difference. So, trade smart, not hard.

Which One is More Accurate? Diamond Tops or Diamond Bottoms

Accuracy in trading is more of an art than a science.

Both diamond tops and bottoms can provide reliable reversal signals. However, many traders find diamond tops more reliable because fear (which drives downtrends) is a stronger emotion than greed (which drives uptrends).

Still, don’t take it as a hard and fast rule.

Are Diamond Formations Reliable Reversal Indicators?

In a nutshell, yes. Diamond formations are considered reliable reversal indicators.

Yet, trading is no crystal ball business. Always pair them with other tools of technical analysis for confirmation. Remember, a single indicator is never enough.

Another indicator that could pair well with the diamond pattern is the volume-weighted moving average (VWMA). The indicator helps traders determine the true price of assets.

How Often Does a Diamond Pattern Work?

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Consistency is the trickiest part of trading. Diamond patterns can be incredibly effective, but they’re not bulletproof.

It all boils down to market conditions, your execution, and a pinch of market mood swings.

Practice will help you get there. The more you trade, the better you’ll get at interpreting these patterns.

Diamond Pattern Trading Mistakes to Avoid

Newbies, lend me your ears. Trading the diamond pattern is not a get-rich-quick scheme.

Don’t enter trades based on half-formed patterns. Wait for confirmation before diving in. Never neglect stop losses.

Also, don’t let fear or greed rule your decisions. Trading is not a casino, and even diamond patterns don’t guarantee a jackpot.

Pros and Cons of Diamond Pattern Trading

Trading with diamond patterns is no different. It comes with its set of advantages and drawbacks.

On the one hand, it provides early signals for trend reversals and offers clear guidelines for entry, exit points, and risk management.

On the other hand, it requires patience and experience to spot accurately, and false signals are a possibility.

Key Takeaways

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Remember, folks, small gains add up.

Diamond pattern trading can be a potent tool if you take the time to understand it. It can help pinpoint potential trend reversals, guide your market entries and exits, and manage risk.

But never rely solely on one strategy. Mix and match your technical analysis tools to find what works for you.

It isn’t a silver bullet for your trading plan — but diamond pattern trading is one of many topics you should learn as part of your trading education!

Trading isn’t rocket science. It’s a skill you build and work on like any other. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

Do you use diamond pattern trading in your trading strategy? Let me know in the comments — I love hearing from my readers!

Frequently Asked Questions

What Factors Should I Consider When Using Diamond Pattern Trading?

When using diamond pattern trading, consider the overall market trend, the volume during the formation, and the breakout’s direction and strength.

Also, don’t forget to factor in your risk tolerance and the money management rules in your trading plan.

Are There Any Specific Strategies for Diamond Pattern Trading in Volatile Markets?

In volatile markets, diamond pattern trading can still be effective. The key is to wait for a strong breakout to confirm the pattern.

Adjust your stop loss and profit target levels to accommodate the increased volatility. And always, always keep your emotions in check. Healthy human psychology is a big part of a proper trading system.

How Does the Diamond Pattern Compare with Other Chart Patterns in Terms of Profitability and Risk?

Diamond patterns, like any other chart patterns, carry both risks and potential for profit.

They can be quite profitable as they often signal substantial price reversals. The risk comes from false breakouts and the pattern’s relative rarity.

As always, profitable trading involves more than identifying a pattern—it’s about smart strategies and solid risk management.

What Is a Diamond Bottom Pattern, and Can You Give an Example?

A diamond bottom pattern is a chart formation used in technical analysis, which typically occurs at the end of a significant downtrend.

This pattern is seen as a bullish signal, suggesting a potential reversal of the trend.

For example, if we were examining stocks in the forex market, a diamond bottom formation might be identified by a gradual widening of price fluctuations, followed by a narrowing. This creates a diamond shape on the price chart, hence the name.

What Role Does the Neckline Play in the Diamond Pattern?

In a diamond pattern, the neckline is the price level that connects the swing low points.

It acts as a line of support during the formation of the pattern. Once the price breaks above the neckline, it confirms the pattern and suggests a potential bullish reversal.

Traders often set their price target based on the height of the pattern added to the breakout point at the neckline.

How Do Brokers and Beginners Approach Diamond Patterns?

Brokers and beginners should approach diamond patterns with care, as they can be complex to identify and trade.

It’s important to wait for a strong breakout from the pattern and the neckline before considering a position. Incorporating other technical indicators, such as moving averages or MACD, can help confirm the pattern and the subsequent trend reversal.

It’s also crucial for beginners to consider the broader market context and not trade based solely on the appearance of a pattern.

How Do the Candles and Trading Volumes Factor Into Diamond Patterns?

Candles, candlesticks, and trading volumes are essential components of diamond patterns.

The candles represent price movements within specific periods, forming the structure of the pattern. The size and shape of the candles can provide clues about the strength of the trend and potential reversal points.

Trading volumes also play a significant role. Volumes often increase as the pattern develops and reach their peak at the broadest part of the pattern.

A subsequent decline in volumes, followed by a sharp increase at the breakout, can confirm the validity of the diamond pattern.

How Do the Candles and Trading Volumes Factor Into Diamond Patterns?

While the basic structure of diamond patterns remains the same, their appearance and implications can vary between stocks and commodities.

This is primarily due to the differences in these markets. For instance, commodities are heavily influenced by supply and demand factors, seasonal cycles, and geopolitical events.

These factors can lead to more frequent and larger price swings, potentially leading to the formation of more pronounced diamond patterns. However, the trading rules applied to these patterns remain the same across all markets.

Can You Combine the Diamond Pattern With Other Technical Analysis Methods Like Elliott Wave, Fibonacci, or Pivot Points?

Yes, combining the diamond pattern with other technical analysis methods can enhance its predictive power.

For example, the Elliott Wave theory can help identify the larger trend within which the diamond pattern is forming.

Fibonacci retracements can provide key levels of support and resistance within the pattern, while Pivot Points can help identify potential breakout points.

However, it’s essential to remember that while these methods can improve accuracy, no technical analysis method is infallible.


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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”