Summary: The Diamond Top Chart Pattern is a shape that looks like a diamond and usually forms at the top of an uptrend. It is a bearish reversal pattern, meaning it signals that the price might start falling soon. When the price breaks below the pattern, it can be a good time to sell or exit. It’s rare but very powerful.
In this blog post, we’ll learn about the diamond top chart pattern, how to identify it, trading strategies, examples, and essential tips to consider while trading with it. So, let’s discuss…
What is the Diamond Top Chart Pattern?
The Diamond Top Chart Pattern is a rare but powerful bearish reversal pattern that forms at the top of an uptrend. Shaped like a diamond, this pattern signals a potential trend reversal from bullish to bearish.
It gets its name from the diamond-like shape that forms as price volatility widens and then narrows.
It’s the opposite of a Diamond bottom, which appears after a downtrend and indicates a bullish reversal.
How to Identify Diamond Top Chart Pattern
To identify the Diamond Top pattern on a chart:
- Look for the widening of price action with higher highs and lower lows (expanding triangle).
- Followed by narrowing price action forming lower highs and higher lows (contracting triangle).
- The overall shape resembles a diamond or rhombus.
- It usually forms on higher timeframes and is more reliable when accompanied by high volume during a breakdown.
Formation of Diamond Top Pattern
The pattern usually forms at the top of this uptrend.
Expansion Phase
The price starts moving up and down in bigger swings. It becomes volatile and unstable, showing signs that the trend might be changing.
Contraction Phase
The big price swings slow down, and the movement becomes tighter, like the market is losing momentum and preparing for a shift.
Breakout
Finally, the price breaks below the bottom trendline of the pattern. This is a strong bearish signal, showing that the uptrend has ended, and the price may start falling.
How to Trade the Diamond Top Pattern
Here’s the complete guide, how traders can trade this pattern…
Entery Point
Enter the trade when price breaks below the lower trendline of the contraction phase.
Stop Loss
Place the stop loss above the highest point of the diamond pattern.
If the price moves in your direction, trail your stop loss using this technical indicator to protect your gains.
Profit Target
Measure the height of the diamond from its widest point, then add that same distance below the point where the breakout happens. This gives you a rough idea of where the price might go next.
Pros & Cons of Diamond Bottom Pattern
Pros
- Find the reversal signal.
- Suitable for short-term trading
Cons
- Rare, not commonly found.
- False breakouts possible (Candle Wicks)
Common Mistakes to Avoid
When trading with this pattern, avoid some common mistakes like trading inside the range and relying too much on textbook patterns.
- Misidentifying pattern: not every diamond-shaped structure is a true Diamond Bottom.
- Trading without waiting for confirmation of a breakout.
Most importantly, if the pattern looks confusing, it’s okay to skip the trade to protect your capital is more important.
Have you traded the Diamond pattern before? What is your favorite chart pattern aside from the Diamond?
Let me know in the comments below!…..