The diamond figure is a graphical model in technical analysis and in Forex market that occurs rarely. It is also known as diamond pattern. It has the exact structural form of the precious stone, from where derives its name – Diamond. This brilliant graphical price pattern serves for existing trend reversal confirmation in case of its occurrence on the chart. Traditionally it appears in an uptrend. Forex trader can make really a huge profits in case of its right identification.
The diamond pattern is formed by a combination of two triangles. The right side forms a symmetrical triangle while the left side is an inverted broadening triangle. Together they make up a diamond pattern . The pattern is characterized by four limited trend lines which represent two support lines below and two resistance levels above. They connect the most recent lows and highs respectively that visually form a figure shaped as a brilliant or a rhomb as price fluctuations amplitude initially widens and then narrows.
Diamond pattern may occur both after prices rise and after a descent. The breakout can be in either direction regardless of when they form. Sometimes there’s a pullback or throwback after the breakout. A pullback is when price retraces from a break downward and a throwback is when price retraces after a break upward. Though some traders believe that pullbacks and throwbacks weaken the profit potential of the pattern, it offers another chance to enter the trade if it occurs. Stops are inside the pattern which limits the potential loss if the pattern doesn’t work out. As soon as a support line at the right is violated (plus a possible deviation), it can be interpreted as change in direction of the trend downwards and serves as a sell signal.
The price depending on brilliant pattern formation is generally believed to fall at least to its target level, which is calculated in the following way:
T = BP – H,
T – target level;
BP – right support breakthrough point;
H – pattern’s height (distance between pattern’s bottom and top).