Defining the diamond top formation
The diamond formation, also known as the diamond top, is a rare and uncommon chart pattern formation. It is a technical analysis that happens either at the market top or near the market top. When there is a diamond top, it can only be two things. One is an uptrend, and the other is a reversal. It is named as such because a diamond shape shows as the trendlines connect the peaks and troughs due to the asset’s price movement.
Tell me more about diamond tops!
Some situations cause a diamond top formation to appear. One is a strong price uptrend which sides flatten in the long run. We have said that a diamond top formation is also a signal of a reversal. Reversals are a technical trader’s best friend since they can gain a massive profit from it. Many consider a diamond top pattern as a very powerful one. Technicians suggest that a trader calculate the distance between the diamond’s highest and lowest point and add that to the breakout point as soon as the diamond’s neckline breaks. Once the calculation is done, a trader will know the potential move.
What are the characteristics of a diamond top formation?
Sine a diamond top formation is a powerful signal, we have written below some of its typical characteristics so that you will know when you encounter them:
- Trend. The asset’s price is trending in an upward direction.
- Pattern. At the onset, the start of a price action’s peaks and troughs resembles a broadening pattern.
- Price action change. The change happens at a lower peak and a higher trough.
- Peaks and troughs connection. If you connect the peaks and troughs, you should have a diamond formation. It is common to see the diamond tilted on one side.
When can we see diamond formations?
There are two parts of a diamond formation. They are the diamond top and the diamond bottom. It is common to see diamond tops in the latter part of an uptrend. On the other hand, we can usually see diamond bottoms at the last part of a downtrend.
The confusion between diamond formations and head and shoulders formation
Some people get confused with diamond formations and head and shoulders formations. The head and shoulders formations are also popular and robust signals. It is essential to be vigilant and observe properly to avoid going short too early. Diamond tops occur before a head and shoulders pattern.
A head and shoulders formation is way too different from a diamond formation but not with double tops and bottoms. The only difference is that their highs and lows are less distinct.
So, why is a diamond formation important?
We have mentioned that diamond formations are strong signals of an uptrend or a reversal. A trader can take advantage of situations like trends and reversals because they give the most profits; hence, technical analysts make efforts to identify them. It is not impossible since they have standard patterns to help identify them.