In Forex trading strategies we use many patterns formed by price movement for making forecasts. In fact, each pattern is a part of the trading strategy. One of the patterns is the diamond. This pattern is constructed from two triangles, which when they are connected, look like a cut diamond. Its appearance on the chart indicates possibility of slowdown of the price movement, which means that after strong volatility, both bears and bulls have lost strength and it is not clear now where the price will move.
Formation of the diamond pattern takes place when the strength of both bears and bulls are almost equal and breakdown of the boundaries of the pattern may mean that one of the sides has taken the lead.
Note, that a diamond pattern is quite rare and requires coincidence of several circumstances.
Building up of a pattern
For building up a diamond pattern on the chart we need to study the rules of plotting a triangle. We want to have two triangles, which mean that we will need 6 points.
First triangle has an expanding shape and the second triangle is built as a mirrored copy of the first one. Two points in the middle, representing the tops, as well as the bottoms of the triangles, will coincide. As a result we have a rhombus of the irregular shape or a diamond.
As we said before, the formation of a diamond on the chart indicates slowdown of the price movement, so the price can break down the boundaries of the pattern in any direction.
Therefore, breaking down one of the boundaries or consolidation of the price outside the pattern is the he moment of entering the market. The moment of breaking down of a diamond can be regarded as an aggressive signal; traders who prefer conservative trade shall wait when one or several candles will close outside the borders of the pattern.
The chart shows that after the breaking down the pattern, the price begins to in the chosen direction and even has made a significant leap, which means that in case of the conservative transaction, part of the profit would have been missed.
Last high of the price can be used as a point for placing stop-loss order. It is important not to confuse this level with the top of the pattern, since in this case, protective level will be too far from the price level, which contradicts risk management rules.
Here we offer three tips for placing take profit order:
- According to the risk management rules, a trader shall count the number of points to the stop-loss, multiply this value by two or three and add it to the opening price.
- Set the order at the level of the last high or low. In the example on the chart the level of the take-profit will be the bottom of the pattern, that is, the lowest point.
- Calculate the number of points making up the widest part of the diamond and transfer this value from the high or low.
A trader can decide not to place a take profit order at all, especially if the trading platform includes an option of trailing stop, which transfers stop-loss level following the movement of the price.