Diamond Tops and Trading Tactics
Diamond pattern forms after an upward price trend. Breakout is upward.
identification guidelines for diamond tops
Prior price trend. The short-term price trend is up just before the formation,
leading to the minor high on the left. Then prices decline and form a
minor low before moving higher again. In late September, prices reach a new
high before cascading downward to finish below the prior minor low. Again,
prices rise up and form another minor high before breaking down through the
upward trend line on the right.
Diamond shape. The fluctuations of minor highs and lows form a diamond
shape when the peaks and valleys connect
Volume trend. The volume trend is receding, especially in the latter half
of the formation when the price is narrowing (and the chart pattern resembles
a symmetrical triangle).
Breakout volume. The breakout volume is usually high but is not a prerequisite
to a properly behaved diamond.
Should you locate a diamond pattern and discover that it may be a headand-
shoulders top, do not worry. In both cases, the formation is bearish. When
such a collision occurs, choose the formation that gives you the more conservative
performance results (see the measure rule).
Support and resistance. Support and resistance for diamond tops commonly
appear at the top of the formation
target price Measure rule Compute the formation height by subtracting the lowest low
from the highest high in the formation. For downward
breakouts, subtract the difference from the location where
prices pierce the diamond boundary. For upward breakouts,
add the difference to the breakout price. The result is the
minimum price move to expect. Alternatively, formations often
return to price levels from which they begin. The base serves as a minimum price move.
Wait for breakout For best results, wait for price to close outside the diamond
trend line before placing a trade signal .
Risk/reward Look for support (risk) and resistance (reward) zones before
placing a trade. These zones are where the trend is likely to
pause or even stop. From the current closing price (before the
breakout), compute the difference between the zones and the
current price. The ratio of the two must be compelling enough to risk a trade.
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