How to Trade the Diamond Pattern on eToro

While most traders focus on popular bullish or bearish markets, the lesser-known Diamond Pattern can offer substantial profits in volatile markets. Let’s dive into this trend reversal pattern and learn how to implement it on eToro.

Understanding the Diamond Pattern

A Diamond Pattern is a trend reversal pattern that signals a price rise after a fall or vice versa. It consists of a series of trend lines connecting higher highs and lower lows at the end of a trend. The pattern has four lines, forming a diamond shape.

Diamond patterns appear in volatile markets, whether bullish or bearish, and can emerge at any range. A Diamond Top Pattern forms at the peak of a bullish market, signaling a reversal to a bearish market. Conversely, a Diamond Bottom Pattern appears at the end of a bearish market, indicating a reversal to a bullish market.

Pros and Cons of Trading the Diamond Pattern

Pros:

• Offers profit opportunities in volatile markets.
• Can be used on various timeframes, such as weekly, monthly, or intraday charts.
• Helps traders identify well-timed entry and exit points.

Cons:

• Less common and harder to identify compared to other chart patterns.
• Can be easily confused with other patterns like the Head and Shoulders pattern.
• Requires a strong understanding of trend lines and price action analysis.

Analyzing Diamond Top Patterns

When dealing with bullish markets, decision-making becomes more challenging towards the end of the trend. Diamond Top Patterns signal a reversal to a bearish market, prompting traders to exit positions or sell.

As an example of a diamond top pattern, we’ll be using the stock CORN from eToro.

In this example, the Diamond Top Pattern appears during a volatile bullish market. The price reverses as soon as it touches the diamond’s sides, and the breakout occurs when the right side is breached. After breaching the trend line, the price tries to rise again but fails, leading to a steep downtrend. In this situation, exiting positions at the breakout point helps avoid significant losses from the steep downtrend.

Analyzing Diamond Bottom Patterns

The Diamond Bottom Pattern forms at the end of a bearish trend, signaling a reversal to a bullish market. Traders should build their positions to ride the price increase. Let’s examine a Diamond Bottom Pattern in the chart of 888 Holdings:

For the example of the diamond bottom pattern, we’ll be looking at the chart of 888 Holdings for the pattern.

In this example, the Diamond Bottom Pattern appears over a broad range, taking nearly five months to complete the formation. The trend begins in a bearish market and reverses to a bullish market. Breakouts are usually confirmed by a strong series of candles penetrating the trend line, as shown in both examples.

Additional Considerations

Traders might confuse the Diamond Pattern with the Head and Shoulders pattern, as both are composed of a series of price reversals. However, their breakout points differ: the Head and Shoulders pattern relies on a neckline for the breakout point, while the Diamond Pattern depends on the right-side trend line. Misinterpretation can lead to premature exits or entries, resulting in costly losses.

By recognizing the diamond formation early, traders can make short and safe profits from each bounce within the diamond. Prices generally stay within the diamond, so traders should buy or sell each time the price touches a diamond side. The highest profit potential occurs when the diamond’s trend line or side is breached during a breakout.

Final Thoughts

Chart patterns are invaluable tools for assessing market conditions and making profitable decisions. Though the Diamond Pattern

is less common and harder to find in a chart, it can be used independently and deliver promising results depending on market assessment.

Mastering the Diamond Pattern, along with other chart patterns, requires practice and experience. To hone your skills, create a virtual account on eToro. This virtual account allows you to trade in real-time markets using virtual money, providing a realistic trading experience while practicing pattern recognition and application. Join Now!

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Author & Expert Trader - Financial Analyst :

My name is Bart Bregman and I am a full-time professional trader with nine years of experience. I specialize in shorter-term trading using technical analysis, and I have extensive experience with Stocks, CFDs, Options, and Crypto trading. I believe that there is no such thing as a bad trade. I'm currently traveling the world as a digital nomad trader. You can follow my journey on Instagram at https://www.instagram.com/bart_bregman/