Trading the Diamond Patterns
The diamond patterns in forex earn their name because when the pattern is completed and boundaries are drawn in with trend lines, they form the four sides of a diamond. These diamond patterns are reversal patterns, and their appearance at the extremes of the trend signal a market turning point or reversal.
There are two types of diamond patterns:
a) The Diamond Top and
b) The Diamond Bottom
The difference between the two is simply that one appears at the top of an up-trend, while the other shows up at the bottom of the trend.
Tracing the Diamond Pattern
The level of success you experience in the use of this chart pattern in your trading will depend in part on the trader's ability to trace this pattern correctly. In this section, we will describe how to do this.
The diamond pattern is actually a head and shoulders (diamond top) or inverse head and shoulders pattern, with trend lines traced from the left shoulder to the head and further to the right shoulder, and then from there to any trough (diamond top) or crest (diamond bottom) that the candlesticks in the head and shoulders pattern or inverse head and shoulders pattern has formed respectively. This completes the four sides of the diamond and depending on where the pattern has formed, the trader can decide to go long or short at the break of the diamond formation.
Trading with the Diamonds
The diamond patterns are derived from either a head and shoulders or an inverse head and shoulders pattern, and these on their own are powerful reversal patterns. In the diamond pattern, the trader is seeking to trade a candle break of the side of the diamond marked D.
The best signals are obtained when confirmation is used for trade entries. Since this is a reversal pattern, one of the best indicators to use for a confirmation is the Stochastic oscillator. This is because as an indicator of overbought and oversold conditions in the market, the Stochastic will work in tandem with the diamond pattern to reveal exact entry points. The success rate of this pattern is very high when everything falls into place and the trader makes no mistake in identifying the signals.
Executing The Long Trade
a) The long trade can only be made with a diamond bottom pattern. Trace the diamond when it forms.
b) Wait for a break of the side D on the diamond. A break is said to have occurred when the candle in question has cut through the D side upwards and has closed above it (not merely breaching it and then retracing below it).
c) If the lines of the Stochastics oscillator cross at <25, go long at the open of the next candle, or place a pending order (Buy Limit) to rest on side D. Look at the trade example below:
Executing The Short Trade
a) The short trade can only be made with a diamond top pattern.
b) After tracing the diamond, wait for a break of side D on the diamond. A break is said to have occurred when the candle in question has cut through the side D downwards and has closed below it.
c) If the lines of the Stochastic oscillator cross at >75, go short at the open of the next candle, or place a pending order (Sell Limit) to rest on side D. See trade example below:
This is a chart pattern when executed well should short work of harvesting pips for you should you add it to your tool box for trading the Forex market.