How to Trade Diamond Chart Patterns - Winning Strategies
Diamond Chart Pattern Definition
A infield chart formation is a infrequent chart pattern that looks similar to a head and shoulders radiation diagram with a V-shaped neckline. Baseball diamond graph reversals rarely pass off at market bottoms, IT most often occurs at major tops and with high-book. Since diamonds are a variation of head and shoulders tops, you have to resist the trust to assort every fountainhead and shoulders top Eastern Samoa a diamond formation. The reasonableness you will want to quash this is because the diamond will signal a shift in tendency much earliest than a head and shoulders pattern, which could issue in a untimely short position. To calculate the breakout prospective for a diamond formation, you will want to take the distance between the highest and lowest repoint in the diamond organization and add information technology to the breakout point. However, in most occurrences a breakout from the diamond chart formation will carry stocks much further.
Adamant Chart Pattern Example
Diamond Graph Formation
Above you see an example of a baseball diamond shape radiation pattern.
The prisonbreak of the diamond appears when the terms goes through the depress right English of the pattern.
The red pointer on the image shows the moment when the minimum potential of the pattern is give, which represents the total sized of the diamond formation from the breakdown point.
How to Trade the Baseball diamond Chart Pattern
Identifying the Pattern
Below you will see a false diamond chart pattern, which appears to be an inverted head and shoulders pattern.
See that the upside-down header and shoulders shape contains the price action. The false adamant on the compensate creates sides which are too sharp.
In this manner, the infield normal is invalid and we confirm an upside-down head and shoulders on the chart.
At once let's review a real diamond chart pattern:
diamond graph pattern example
Again, we feature similar monetary value action arsenic our previous case.
This time, the shoulders of the pattern are not equally sharp. Hence, the lower sides of the baseball field are more cruciate to the opposite ones. This validates the structure of the diamond formation passes the "sniff" test.
Now, see at the right image. See that the two shoulders are mainly formed by candlewicks and non wax light bodies. At the same time, the candles in the head and the second shoulder are relatively big.
This means that the stock is volatile, because volumes are high. Arsenic you probably noticed, this is something, which is not present in the previous example where the cd bodies are smaller and the price action is not as unstable.
Diamond Pattern Craft Entry
All chart establishment has its trigger line, which provides a point of where a trade decisiveness should be made.
For the head and shoulders pattern, this is the neck line between the two shoulders. For the diamond chart pattern, this is the turn down right side of the bearish diamond blueprint and the top right side of the bullish diamond pattern.
bearish diamond graph
Above is an example of a pessimistic diamond pattern. The loss circle shows the moment when the price action breaks the lower right side of the diamond. When this descent is breached, you should open a trade in the focal point of the gaolbreak depending on the type of diamond you have happening the graph.
In this case, we have to short sell the stock, since the ball field pattern is bearish and the prisonbreak is also to the downside.
Adamant Pattern Stop Loss
You should always use a stop loss order when trading the diamond pattern.
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The halal location of your stop should be above the last top inside the diamond for bearish setups and below the last low of inside the diamond for bullish setups.
pessimistic diamond graph equipment failure
In the above case, we have a bearish diamond organization.
Therefore, the stop expiration edict should be placed in a higher place the last top inside the form. The envision above shows the rightish place of a occlusive going order of a diamond trade.
Some other option is to lay out your stop loss order above the highest high of the diamond, but this testament increase the risk for the trade.
How to Hold Profits from the Diamond Approach pattern
As we said above, the minimum price move expected from the diamond chart pattern equals the sizing of the organization.
For example, if the distance between the upper and the lower edge of the diamond equals $1.50 per parcel, and then you should pursue a move of $1.50 per share.
adamant chart target
This is the same baseball diamond example from the cases above. However, this clock time we have added the minimum target of the pattern.
The initiative blue line measures the size of the adamant radiation pattern. The second blue arrow equals the size of the first blue arrow, simply it is applied over the monetary value action. The green horizontal line indicates the token mark we should lieu when we deal out this form. The moment the price breaks this level, we have the option to pass the patronage.
However, that's not all. We besides said that in many cases the lower limit target of the diamond is not the end of the price move.
Therefore, a good approach to extend your diamond's target is to add a volume weighted moving common. Since the stock volumes are crucial for the check of the baseball field pattern, they are also important for determining exit points. When you enter a diamond trade, you should concur your pose until the terms breaks the VWMA in the opposite direction or until your stay loss is hit.
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Diamond Pattern Trading Strategy
Rent out's now apply these trading rules into a complete diamond pattern strategy.
We will confirm the presence of a diamond shape along the chart. And so we volition infix the market when the initiation line of the baseball field is broken, placing a stop loss on the far side the last top/bottom inside the pattern.
We volition stay into the trade for a minimum price move over equal to the diamond itself. We will disregard the VWMA breakouts prior to arrival the stripped poin.
After the target is reached, we will halt in the commercialise until the VWMA is broken in the opposite direction.
To a lower place is an example of an actual trade:
diamond chart trade example
You are looking at the 3-minute chart of Boeing from June 13, 2016.
The image illustrates a diamond rear pattern (black trope), which reverses the bearish cost move.
Since the potential of the pattern is bullish, we are practical with a bullish diamond pattern.
The two dirty arrows on the chart measure and apply the size of the diamond As a minimum target of our trade. We have also added a volume weighted moving average along the chart in order to extend potential net profit from the trade.
At the bottom of the graph, we also have a volume indicator systematic to monitor the trading volumes of Boeing.
See that the chart look-alike starts with a price decrease. Short, the price action enters a consolidation phase and develops into a baseball diamond on the chart.
During the creation of the baseball field, the volumes are relatively senior high. The shape of the price legal action is Interahamw away from the inverted capitulum and shoulders.
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Therefore, we have confirmed the presence of a bullish diamond pattern on the chart.
After the damage action breaks the upper right side of the shape, we go long placing a block up loss at a lower place the last bottom of the model. The proper location of the stop loss order is shown with the red horizontal parentage on the chart.
The price starts a bullish go by afterwards. Ternary periods after we open our mindful trade, the price fulfi fulfills the minimum prey.
This is when we originate following the signals of the VWMA. The price continues with the increase and we put out our gains. Forty minutes after the price completes the minimum target, the Price action closes with a big bearish wax light, which breaks the VWMA downwards.
We receive an exit signal on the graph and we incommunicative our craft.
The stripped-down target has brought a price addition of $0.11 per share. The extended mark accounted for an additional $0.08 per share. Tired entirely, we consume generated a profit equal to 0.15% for less than an hour.
Let's at present approach a bullish ball field pattern trade:
diamond chart – exiting the swop
Our next example is of one of the all but volatile stocks in recent times – Netflix.
The chart is from June 22, 2016 and IT is a black bearish diamond pattern. Since Netflix is more volatile and accounts for bigger daily terms moves, we increase the periods of our VWMA to 20.
The image starts with a price increase, which ends with a diamond summit rule.
The form is confirmed when the price breaks the lower properly side of the blueprint. This gives us a signal to sell Netflix. We light sell NFLX and we place a stop loss above the last-place top inside the radiation diagram as shown on the double.
Then we create the blue arrows on the chart, which measure the tokenish price target of the figure.
The price starts decreasing afterwards. 20 proceedings after we short Netflix, the Leontyne Price action reaches the minimum target. However, we have the option to prolong our profits by staying in the barter thirster.
As you see, the terms decreases further. See that the volumes are maturation at that time, which gives further confirmation of the Diamond form and the presence of a bearish style.
1 hour after the minimum target was reached the toll action breaks the 20-period VWMA up. This gives us a bullish signal on the chart, which means that we need to collect our gains and exit the trade.
The minimum butt completed a price go off of $0.38 per share. The extended price move brought additional $0.33 per share. In this manner, the total results from our trade adequate a pessimistic price move of $0.70 per share, which equals to a net income of 0.77% along the amount invested.
Conclusion
- The Diamond pattern is a rare, but reliable chart pattern.
- It looks like a rhombus connected the chart. However, it could easily be mistaken for a head and shoulders pattern.
- The diamond model has a reversal characteristic:
- Bullish Diamond Pattern (Diamond Bottom)
- Bearish Diamond Pattern (Diamond Top)
- In stock trading, the bearish diamonds on the top of optimistic trends are more common. The diamond bottoms are rare.
- When you trade a bearish ball field chart pattern, you should comply with the following rules:
- Reassert the diamond pattern by discovering relatively big trading volumes. Establish sure the model is more horizontal, rather than vertical. If the regulate is more vertical than horizontal, then you are probably looking at at a head and shoulders chart pattern.
- Sell when the price breaks the lower right side of the diamond.
- Place a stop loss set up above the last top inside the diamond shape happening the chart.
- Stay in the trade for a minimum bearish move equal to the sizing of the diamond pattern.
- You potty extend profits aside simply adding a mass weighted moving average. When the price breaks the VWMA upwards after additive the minimum target, you should exit the trade. If the inventory is glorious to atomic number 4 more volatile, practice a large VWMA.
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Source: https://tradingsim.com/blog/diamond-chart-formation/
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