The “Diamond” pattern is very reliable and consists of four-sided price action. It is also similar to adding two “triangle” patterns, Inverted and Symmetrical, together. “Diamond” patterns are both continuation and reversal patterns. If the pattern occurs in the midst of a trend, it will present a continuation of the trend in the same direction prior to the formation. If the pattern occurs at the tops or bottoms, it will be a reversal pattern. Diamond “tops” form more often than Diamond “bottoms.”

Trade: In “Diamond” patterns, continuous patterns form more often than reversal formations. In a continuation pattern, wait for a breakout of the “Diamond” pattern and trade in the direction of the trend prior to the pattern formation. In reversal formations, trade in the opposite direction of the prior trend. Confirm breakouts and breakdowns by price-action.

Target: Continuation “Diamond” patterns provide excellent target criteria. The prior range before “Diamond” formation is the target from the breakout or breakdown level. In reversal formations, prior major swing highs/lows are set as the targets.

Stop: Place a “stop” order above the high of the “Diamond pattern for a short-trade and below the low of the “Diamond for a long-trade.

Trading Diamond Pattern

Trading Diamond Pattern

The example above shows a continuation “Diamond” pattern from the daily Dow Emini Futures (YM) chart. In March 2005, after making a “swing high” of 11460 (A), YM corrected and declined to 10500 (B). While correcting, YM paused and formed a “Diamond” pattern from mid March to April 2005.

  1. Wait for a clear breakout from the “Diamond” pattern.
  2. Enter a “short” in the direction of the prior trend before the “Diamond” pattern at 10850.
  3. Place a “stop” order above the high of the “Diamond” at 11050.
  4. Target – the range of AB (500 points) from C to 10500.

Trading Diamond Pattern

Trading Diamond Pattern

The example above shows a “Diamond pattern continuation from the S&P Futures (ES) 610 tick chart. On January 25,2007, after making a “swing high” of 1446 (at A), the ES corrected and traded lower to 143 8 (at B). The ES formed a “Diamond pattern from 1436 and 1438.

  1. Wait for a clear breakdown from the “Diamond pattern.
  2. Enter a “short” trade in the direction of the prior trend (before the “Diamond pattern) at 1435.
  3. Place a “stop” order above the high of the “Diamond at 1438.
  4. Target the range of AB (8 pts) from C to 1428.