The figure Diamond or Diamond refers to classical graphical analysis figures.
It does not appear on charts very often, but the ability to identify it and use it in making trading decisions can significantly enrich the trading arsenal of any trader. How a Diamond figure is defined, what its features and similarities with other graphical analysis figures, as well as what market mechanics cause its appearance, we will analyze in this article.
Peculiarities of a Diamond Shape
The diamond refers to the figures of the turn. That is, after its appearance, the trend most often changes to the opposite. That's not a 100% rule. But if the figure is correctly identified, if the context is correct and the Diamond is indeed found, the trend reversal can be expected with high probability.
This formation looks like a rhombus. But we decided to call it a more noble name. So, Diamond is a kind of flute that appeared after the trend. But it can be approximately in the middle of the peak and the minimum, which will be, respectively, above and below its neighbors.
It is this pattern appears on the older time intervals from D1 and above. If you notice the same formation on the lower timeframes, it will most likely be not a Diamond or even a reversal pattern, but on the contrary, a continuation. And that's why context is very important.
When on the lower timeframes the price after a sharp movement stops and draws a similar flat, it is most often just a break, when the players who started the movement, get their positions, fix part of the profit, and new ones join them. And after that, the movement continues with new strength.
But if after a strong movement such a long flat appears on the daily chart, it indicates that the trend has dried up. A new opposing force has appeared, which does not let the price move on. And there is usually a new accumulation of positions of a large player who wants to push the price in the opposite direction.
Until the Diamond has formed, and there is, for example, only half of this flute, trading can be very difficult. In the price bursts in the middle of the flute, when the price jumps out of the corridor, the big player kicks the stops of those who trade in the flute, in order to gain their position at their expense. But if you notice a Diamond, when it is already externally recognizable, it is worth watching closely, waiting for signs of a price break in the direction of reversal and enter the market.
How do you trade with a Diamond figure?
First of all, you have to wait for the formation of a figure. That is, if you see that after the trend, the price has gone into the flat, the flat began to expand, making up and down the price, and then began to narrow again, shrinking like a spring, forming a section of the chart outwardly similar to a diamond, then this figure is in front of you.
That is, there is no need to think over and imagine that the first trend you get will turn into our figure. Expect that it may be worth it only if after the flat price spread went up and down, and then began to narrow down the price range again.
And that's when the price goes beyond the boundaries of the pattern, making a breakthrough towards trend reversal, then it should enter the market. But ideally we should wait for the Diamond's border retest on the reverse side. And if there are some confirmations on the retest, for example, by candlestick analysis, then you can open a deal. But even that is not recommended to enter when the price breaks the border of a shape. It is better to wait for the support or resistance line of the channel, inside which the Diamond appeared.
For example, on the screenshot above the point 1 is marked, where the price has broken through the support level. But as you can see, after that it turned and went higher, making at point 2 a retest of the lower boundary of the figure. Ideally, it was worth entering here. The price broke the down direction, made a retest, there was a doji in the place of retest with big tails, and the price did not go back inside the pattern.
The safest, but not the most profitable would be the entrance at point 3. The price after the retest went down, showing the initiative from the bears again. Once again, the support of the channel was broken through. The price tried to rise above the support again, but there was a dwelling house with a big upper tail right under it, which indicates the rejection of the price by the sellers and their unrelenting pressure. This entry would look more reliable in a moment.
It would be better to come out at the nearest historical level or using other graphical analysis tools. Or by your trading system, signals opposite to your deal may appear.
But with the help of the figure itself, you can at least estimate possible targets for the deal.
It is recommended to place the Stop Loss over the nearest or far border of the figure, but on condition that you comply with the risk management rules. You can also put a stop over the nearest border of the channel that the price has broken through. Thus, the stop will be shorter, but the probability that it will be beaten on a rollback is also high. You can also check https://www.investopedia.com/terms/d/diamondtop.asp for in-depth study.
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