The diamond chart pattern is a technical pattern that can occur either at the end of a falling or rising trend. It is a powerful reversal pattern that - unlike many other technical patterns - can only be observed rather exceptionally.
In case the pattern becomes visible at the end of an uptrend it is a bearish reversal pattern. If the pattern occurs after a clear downtrend it's called a bullish reversal pattern.
in the first part there is a widening trend channel in which the price moves up and down. This forms the top and bottom of the pattern.
in the second section, the trend channel narrows again.
When trend lines are drawn between the beginning, middle and end points, you recognize the typical shape of a diamond emerge. Hence the name.
The pattern is not common, it is rather rare. Therefore, the number of opportunities to trade this pattern will be rather low. The danger with this is that as a trader you will eventually begin to hold diamond patterns which are not actually there. Patterns where, for example, only three of the four trend lines are clearly distinguishable mean that the pattern does not meet the conditions.
In addition, the diamond pattern - unlike, for example, double bottoms or triangle formations - is more difficult to recognize. Taking into account the rarity of the pattern, this ensures that good patterns are often recognized too late.
The general rule of determining the price target by the height of the pattern itself applies equally to this diamond pattern, which is the distance between the highest peak and lowest bottom within the pattern.
The ChartMill Team