What Is The Diamond Bottom Chart Pattern?
A Diamond Bottom to is a diamond-shaped pattern that appears at bottom of a trend as a reversal pattern.
Price action begins to take on a broadening shape until a trough is formed, then price action begins to converge until a break down occurs.
How To Identify The Diamond Bottom Pattern?
You can identify a Diamond Bottom pattern by looking for a broadening shape formed by a series of higher highs and lower lows.
This is followed by a constricting shape formed by a series of lower highs and higher lows.
The peaks and troughs of the trendlines connect to form a diamond shape, hence the name.
What Is The Psychology Behind The Diamond Bottom Pattern?
The Diamond Bottom pattern is a bullish chart pattern that can provide traders with valuable insights into the market’s psychology.
It’s characterized by a diamond-shaped pattern formed by four converging trendlines, with a horizontal line acting as the support level.
The pattern typically takes several weeks or months to form and is a sign of a potential trend reversal.
Traders interpret the pattern as a sign of a transition from a bearish market sentiment to a bullish market sentiment.
The pattern represents a period of indecision in the market, where buyers and sellers are evenly matched, but ultimately buyers gain momentum and push the price higher.
The psychology behind the diamond bottom pattern is that the upper trendline represents the resistance level, where sellers are in control and pushing the price lower.
The lower trendline represents the support level, where buyers are in control and pushing the price higher.
The converging trendlines represent a period of indecision in the market, where both buyers and sellers are unsure of the direction of the trend.
As the pattern continues to form, buyers start to gain momentum, and the price gradually moves higher towards the resistance level.
Once the price breaks above the resistance level, it’s a signal that the trend has reversed, and traders may enter long positions.
How To Trade The Diamond Bottom Pattern?
To trade the Diamond Bottom pattern, traders typically wait for the price to break above the resistance level with a strong volume surge.
The breakout should ideally occur on higher than average trading volume, as this confirms that there is significant buying pressure behind the move.
Traders may enter a long position once the price breaks above the resistance level, with a stop loss placed below the support level.
The profit target can be set based on the height of the pattern, with the expectation that the price will move at least the same distance as the pattern’s height in the direction of the breakout.
Alternatively, traders may wait for a pullback to the support level before entering a long position.
This approach can provide a better risk-to-reward ratio, as the entry price is closer to the support level, and the stop loss can be placed tighter.
However, it may also result in missing out on some of the initial gains from the breakout. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the diamond bottom pattern can also result in a false breakout, where the price briefly breaks above the resistance level before reversing course.
Diamond Bottom Performance Expectations Explained
A bullish reversal is mostly expected, especially once the price crosses the top trendline.
To find potential target, measure from the diamond’s peak to the trough and mulitiply by 73% to the point of breakout.
In the case of a bearish breakout, multiply by 53%.