What Is The Diamond Top Chart Pattern?
A Diamond Top to is a diamond-shaped chart pattern that appears at top 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 Top Pattern?
You can identify a Diamond Top 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 Chart Pattern?
The Diamond Top pattern is a bearish 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 resistance 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 bullish market sentiment to a bearish market sentiment.
The pattern represents a period of indecision in the market, where buyers and sellers are evenly matched, but ultimately sellers gain momentum and push the price lower.
The psychology behind the diamond top 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, sellers start to gain momentum, and the price gradually moves lower towards the support level.
Once the price breaks below the support level, it’s a signal that the trend has reversed, and traders may enter short positions.
How To Trade The Diamond Top Pattern?
To trade the Diamond Top pattern, traders typically wait for the price to break below the support level with a strong volume surge.
The breakdown should ideally occur on higher than average trading volume, as this confirms that there is significant selling pressure behind the move.
Traders may enter a short position once the price breaks below the support level, with a stop loss placed above the resistance 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 resistance level before entering a short position.
This approach can provide a better risk-to-reward ratio, as the entry price is closer to the resistance 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 breakdown. Ultimately, the best approach will depend on the trader’s risk tolerance, trading style, and market conditions.
It’s worth noting that the diamond top pattern can also result in a false breakdown, where the price briefly breaks below the support level before reversing course.
Diamond Top Performance Expectations Explained
A bearish reversal is mostly expected, especially once the price crosses the bottom trendline.
To find potential target, measure from the diamond’s peak to the trough and mulitiply by 63% to the point of breakout.
In the case of a bullish breakout, multiply by 65%.