How to Trade Diamond Chart Patterns – Winning Strategies

Diamond Chart Pattern Definition

A gemstone graph creation is an uncommon graph pattern which looks somewhat like some head and shoulder pattern using a V-shaped neckline. Diamond graph reversals infrequently happen at marketplace bottoms, so it often does occur at major shirts with high-volume. Since diamonds really are a version of mind and shoulders shirts, you’ve got to resist the urge to classify every mind and shoulders as being a diamond creation. The comprehension you may wish to prevent that is due to the fact that the diamond will indicate a rest in tendency many earlier in the day compared to the usual head and shoulders pattern, that might lead to a premature short spot. To figure out the break out possibility of a diamond creation, you may wish to select the exact distance medially the lowest and highest point inside the diamond creation and then insert it into the break out point. But, in the majority of events a break out from the diamond graph creation will take shares many farther.

Diamond Chart Pattern Example

Diamond Chart Formation

Above you see an example of a diamond shape pattern.

The breakout of the diamond appears when the amount goes through the lower right side of the pattern.

The red arrow on the image shows the moment when the minimum potential of the pattern is reach, which represents the total size of the diamond formation from the breakdown point.

How to Trade the Diamond Chart Pattern

Identifying the Pattern

Below you will see a false diamond chart pattern, which appears to be an inverted head and shoulders pattern.

diamond chart pattern

See that the inverted head and shoulders pattern contains the amount action. The false diamond on the right creates sides which are too sharp.

In this manner, the diamond pattern is invalid and we confirm an inverted head and shoulders on the chart.

Now let’s review a real diamond chart pattern:

diamond chart pattern example

Again, we have similar amount action as our previous example.

This time, the shoulders of the pattern are not as sharp. Hence, the lower sides of the diamond are more symmetrical to the opposite ones. This validates the structure of the diamond formation passes the “sniff” test.

Now, look at the right image. See that the two shoulders are mainly formed by candlewicks and not candle bodies. At the equal time, the candles in the head and the second shoulder are relatively big.

This means that the share is volatile, because volumes are high. As you probably noticed, this is something, which is not present in the previous example where the candle bodies are smaller and the amount action is not as volatile.

Diamond Pattern Trade Entry

Every chart formation has its trigger line, which provides a point of where a trade decision should be made.

For the head and shoulders pattern, this is the neck line medially the two shoulders. For the diamond chart pattern, this is the lower right side of the bearish diamond pattern and the upper right side of the bullish diamond pattern.

bearish diamond chart

Above is an example of a bearish diamond pattern. The red circle shows the moment when the amount action breaks the lower right side of the diamond. When this line is breached, you should open a trade in the direction of the breakout depending on the type of diamond you have on the chart.

In this case, we have to short sell the share, after all the diamond pattern is bearish and the breakout is also to the downside.

Diamond Pattern Stop Loss

You should always use a stop loss order when trading the diamond pattern.

The proper location of your stop should be above the last top inside the diamond for bearish setups and down from the last low of inside the diamond for bullish setups.

bearish diamond chart breakdown

In the above case, we have a bearish diamond formation.

Therefore, the stop loss order should be placed above the last top inside the pattern. The image above shows the right place of a stop loss order of a diamond trade.

Another option is to place your stop loss order above the highest high of the diamond, but this will develop the risk for the trade.

How to Book Profits from the Diamond Pattern

As we said above, the minimum amount move expected from the diamond chart pattern equals the size of the formation.

For example, if the distance medially the upper and the lower edge of the diamond equals $1.50 per share, then you should pursue a move of $1.50 per share.

diamond chart target

This is the equal diamond example from the cases above. However, this time we have added the minimum target of the pattern.

The before all else blue line measures the size of the diamond pattern. The second blue arrow equals the size of the before all else blue arrow, but it is applied over the amount action. The green horizontal line indicates the minimum target we should place when we trade this pattern. The moment the amount breaks this level, we have the option to exit the trade.

However, that’s not all. We also said that in many cases the minimum target of the diamond is not the end of the amount move.

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Therefore, a good approach to extend your diamond’s target is to add a volume weighted moving average. Since the share volumes are crucial for the confirmation of the diamond pattern, they are also important for determining exit points. When you enter a diamond trade, you should hold your position until the amount breaks the VWMA in the opposite direction or until your stop loss is hit.

Diamond Pattern Trading Strategy

Let’s now apply these trading rules into a complete diamond pattern program.

We will confirm the presence of a diamond shape on the chart. Then we will enter the marketplace when the trigger line of the diamond is broken, placing a stop loss beyond the last top/bottom inside the pattern.

We will stay into the trade for a minimum amount move equal to the diamond itself. We will disregard the VWMA breakouts prior to reaching the minimum target.

After the target is reached, we will stay in the marketplace until the VWMA is broken in the opposite direction.

Below is an example of an actual trade:

diamond chart trade example

You are looking at the 3-minute chart of Boeing from June 13, 2016.

The image illustrates a diamond bottom pattern (black figure), which reverses the bearish amount move.

Since the potential of the pattern is bullish, we are working with a bullish diamond pattern.

The two blue arrows on the chart measure and apply the size of the diamond as a minimum target of our trade. We have also added a volume weighted moving average on the chart in order to extend potential benefits from the trade.

At the bottom of the chart, we also have a volume indicator in order to monitor the trading volumes of Boeing.

See that the chart image starts with a cost decrease. Suddenly, the amount action enters a consolidation phase and develops into a diamond on the chart.

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During the creation of the diamond, the volumes are relatively high. The shape of the amount action is far away from the inverted head and shoulders.

Therefore, we have confirmed the presence of a bullish diamond pattern on the chart.

After the amount action breaks the upper right side of the shape, we go long placing a stop loss down from the last bottom of the pattern. The proper location of the stop loss order is shown with the red horizontal line on the chart.

The amount starts a bullish move afterwards. Three periods after we open our long trade, the amount action fulfills the minimum target.

This is when we start following the signals of the VWMA. The amount continues with the develop and we extend our gains. Forty minutes after the amount completes the minimum target, the amount action closes with a big bearish candle, which breaks the VWMA downwards.

We receive an exit signal on the chart and we close our trade.

The minimum target has brought a cost develop of $0.11 per share. The extended target accounted for an additional $0.08 per share. All in all, we have generated a benefit equal to 0.15% for less than an hour.

Let’s now approach a bullish diamond pattern trade:

diamond chart – exiting the trade

Our next example is of one of the most volatile shares in recent times – Netflix.

The chart is from June 22, 2016 and it is a black bearish diamond pattern. Since Netflix is more volatile and accounts for bigger daily amount moves, we develop the periods of our VWMA to 20.

The image starts with a cost develop, which ends with a diamond top pattern.

The pattern is confirmed when the amount breaks the lower right side of the pattern. This gives us a signal to sell Netflix. We short sell NFLX and we place a stop loss above the last top inside the pattern as shown on the image.

Then we conceive the blue arrows on the chart, which measure the minimum amount target of the figure.

The amount starts decreasing afterwards. Twenty minutes after we short Netflix, the amount action reaches the minimum target. However, we have the option to extend our benefits by staying in the trade longer.

As you see, the amount decreases further. See that the volumes are growing at that time, which gives further confirmation of the Diamond pattern and the presence of a bearish trend.

1 hour after the minimum target was reached the amount action breaks the 20-period VWMA upwards. This gives us a bullish signal on the chart, which means that we need to collect our gains and exit the trade.

The minimum target completed a cost move of $0.38 per share. The extended amount move brought additional $0.33 per share. In this manner, the overall results from our trade equal to a bearish amount move of $0.70 per share, which equals to a benefit of 0.77% on the amount invested.

Conclusion

  1. The Diamond pattern is a rare, but reliable chart pattern.
  2. It looks like a rhombus on the chart. However, it could easily be mistaken for a head and shoulders pattern.
  3. The diamond pattern has a reversal characteristic:
  • Bullish Diamond Pattern (Diamond Bottom)
  • Bearish Diamond Pattern (Diamond Top)
  1. In share trading, the bearish diamonds on the top of bullish trends are more common. The diamond bottoms are rare.
  2. When you trade a bearish diamond chart pattern, you should comply with the following rules:
  • Confirm the diamond pattern by discovering relatively big trading volumes. Make sure the pattern is more horizontal, rather than vertical. If the shape is more vertical than horizontal, then you are probably looking at a head and shoulders chart pattern.
  • Sell when the amount breaks the lower right side of the diamond.
  • Place a stop loss order above the last top inside the diamond shape on the chart.
  • Stay in the trade for a minimum bearish move equal to the size of the diamond pattern.
  • You can extend benefits by simply adding a volume weighted moving average. When the amount breaks the VWMA upwards after completing the minimum target, you should exit the trade. If the share is known to be more volatile, use a bigger VWMA.

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