Diamond: Trading Reversal Pattern
Author: Maks Artemov
Dear Traders,
Today, we will get acquainted with a tech analysis pattern called Diamond. Compared to other tech analysis patterns, the Diamond pattern appears rather rarely on the chart. This is the number one reason for its being unpopular among most traders. On small timeframes, the Diamond takes little time to form and might work off the signal by a couple of candlesticks. On larger timeframes, from D1 and higher, the pattern may take months to complete, which does not enhance its attractiveness for traders.
Not every trader can afford to wait two-three months for the signal to form. However, the Diamond has its advantages: it works off the signal almost always and may bring a substantial profit.
Conditions for and principles of the Diamond formation
The Diamond is a reversal pattern which forms at the top of an uptrend or the bottom of a downtrend. It is easy to guess that it looks like a diamond.
Diamond pattern forming at the top of a trend
Forming at the top of the trend happens as follows. First, the price forms an expanding triangle: it may be isosceles or of a bit irregular shape. After the price reaches the highs, it starts fading, and on the chart, the amplitude of price fluctuations decreases. This is a decrease in the volatility in some sense, when most market players, especially major ones, have taken their positions and start waiting for other players to act.
Then the second wave of players enters the scene: they have noticed the pattern and are eager to make money on the signal. The thing is that the work-off of the Diamond pattern is based on the greed of market latecomers; however, they cannot compete with the first wave of players and just buy at the place where the players of the first wave start selling (closing the positions that have already yielded some profit).
As a result, the quotations start declining quickly, generating certain panic in the market so that the second wave of buyers also hurry to close their positions. Thus, Diamond shape forms at the top of the uptrend.
Diamond pattern at the top of a trend
Diamond pattern forming at the bottom of a trend
A similar situation may be seen at the lows of a downtrend, only market participants swap places. For a time, the market is dominated by bears provoking a downtrend. At a certain point, the price begins a sideways movement, expanding the amplitude (creating an expanding triangle), then volatility shrinks, and a second – converging – triangle forms on the chart.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team
Author: Maks Artemov
Dear Traders,
Today, we will get acquainted with a tech analysis pattern called Diamond. Compared to other tech analysis patterns, the Diamond pattern appears rather rarely on the chart. This is the number one reason for its being unpopular among most traders. On small timeframes, the Diamond takes little time to form and might work off the signal by a couple of candlesticks. On larger timeframes, from D1 and higher, the pattern may take months to complete, which does not enhance its attractiveness for traders.
Not every trader can afford to wait two-three months for the signal to form. However, the Diamond has its advantages: it works off the signal almost always and may bring a substantial profit.
Conditions for and principles of the Diamond formation
The Diamond is a reversal pattern which forms at the top of an uptrend or the bottom of a downtrend. It is easy to guess that it looks like a diamond.
Diamond pattern forming at the top of a trend
Forming at the top of the trend happens as follows. First, the price forms an expanding triangle: it may be isosceles or of a bit irregular shape. After the price reaches the highs, it starts fading, and on the chart, the amplitude of price fluctuations decreases. This is a decrease in the volatility in some sense, when most market players, especially major ones, have taken their positions and start waiting for other players to act.
Then the second wave of players enters the scene: they have noticed the pattern and are eager to make money on the signal. The thing is that the work-off of the Diamond pattern is based on the greed of market latecomers; however, they cannot compete with the first wave of players and just buy at the place where the players of the first wave start selling (closing the positions that have already yielded some profit).
As a result, the quotations start declining quickly, generating certain panic in the market so that the second wave of buyers also hurry to close their positions. Thus, Diamond shape forms at the top of the uptrend.
Diamond pattern at the top of a trend
Diamond pattern forming at the bottom of a trend
A similar situation may be seen at the lows of a downtrend, only market participants swap places. For a time, the market is dominated by bears provoking a downtrend. At a certain point, the price begins a sideways movement, expanding the amplitude (creating an expanding triangle), then volatility shrinks, and a second – converging – triangle forms on the chart.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team