The diamond pattern is a price action formation that is created on a chart by buyers and sellers. It is a lesser-known chart pattern to technical traders than many of the more popular patterns.
This formation is a less frequent and more uncommon reversal pattern on a chart than pennants and flags. It can happen close to a chart’s high points or low points, generating a diamond top or diamond bottom pattern. Both the diamond bottom and the diamond top can be bullish or bearish. Both have a pattern that is recognizable and indicate that the present trend may be coming to an end, but the significance of each signal depends on where on the chart it appears.
A diamond chart pattern starts by first forming a broadening formation with ascending resistance and declining support that is followed by a triangle formation that has descending resistance and ascending support. It is the breakout of the second half of the diamond pattern that signals the entry whether it is a bullish break over resistance or bearish break under support.
A clear uptrend must be in place before a valid bearish reversal signal. A clear downtrend must be in place before a valid bullish reversal signal.