Diamond Tops and Trading Tactics
Diamond pattern forms after an upward price trend. Breakout is upward. identification guidelines for diamond tops Prior price trend. The short-term price trend is up just before the formation, leading to the minor high on the left. Then prices decline and form a minor low before moving higher again. In late September, prices reach a new high before cascading downward to finish below the prior minor low. Again, prices rise up and form another minor high before breaking down through the upward trend line on the right. Diamond shape. The fluctuations of minor highs and lows form a diamond shape when the peaks and valleys connect Volume trend. The volume trend is receding, especially in the latter half of the formation when the price is narrowing (and the chart pattern resembles a symmetrical triangle). Breakout volume. The breakout volume is usually high but is not a prerequisite to a properly behaved diamond.
Should you locate a diamond pattern and discover that it may be a headand- shoulders top, do not worry. In both cases, the formation is bearish. When such a collision occurs, choose the formation that gives you the more conservative performance results (see the measure rule). Support and resistance. Support and resistance for diamond tops commonly appear at the top of the formation
target price Measure rule Compute the formation height by subtracting the lowest low from the highest high in the formation. For downward breakouts, subtract the difference from the location where prices pierce the diamond boundary. For upward breakouts, add the difference to the breakout price. The result is the minimum price move to expect. Alternatively, formations often return to price levels from which they begin. The base serves as a minimum price move. Wait for breakout For best results, wait for price to close outside the diamond trend line before placing a trade signal . Risk/reward Look for support (risk) and resistance (reward) zones before placing a trade. These zones are where the trend is likely to pause or even stop. From the current closing price (before the breakout), compute the difference between the zones and the current price. The ratio of the two must be compelling enough to risk a trade.