Diamond Pattern

The diamond pattern is a reversal formation that marks exhaustion at major market tops and bottoms. It forms when price first expands its range (a broadening phase) and then contracts it (a converging phase), producing four turning points that outline a diamond shape on the chart. Diamond tops appear after sustained uptrends and signal bearish reversals; diamond bottoms appear after downtrends and signal bullish reversals. The pattern is most reliable on daily and 4-hour charts across forex majors, equity indices, and large-cap stocks.

How to Identify the Diamond Pattern

1. Prior directional trend — Confirm a clear trend into the formation. For a diamond top, price should have risen at least 3x the eventual height of the diamond. Without a preceding trend, the pattern lacks reversal context.

2. Broadening left half — Price makes a series of higher highs and lower lows over 8-20 bars, widening the trading range. The left half resembles a broadening formation with two or three expanding swings.

3. Contracting right half — Price then makes lower highs and higher lows over a similar number of bars, narrowing the range back toward a point. The right half resembles a symmetrical triangle.

4. Four turning points — Connect the two outer highs and two outer lows with four trendlines. These lines should form a visually clear diamond. The pattern fails if the geometry is too irregular to draw four distinct trendlines.

5. Volume behavior — Volume is elevated and irregular during the broadening phase, reflecting indecision and volatility. It declines during the contracting phase as the battle narrows, then surges on the breakout bar.

Entry Rules

1. Draw and confirm the four trendlines — Both the upper and lower trendlines of the right half must be clearly defined before considering an entry. At least two touches on each line are required.

2. Wait for a close outside the right-side trendline — For a diamond top, wait for a close below the lower-right trendline. For a diamond bottom, wait for a close above the upper-right trendline. Do not enter on a wick or intraday penetration.

3. Confirm with volume — The breakout bar’s volume must be at least 1.5x the 20-bar average. Low-volume breakouts from diamond patterns fail at a significantly higher rate.

4. Enter at close or on retest — Enter at the close of the confirmed breakout bar, or if price retests the broken trendline on the following 1-3 bars. Retest entries improve the R:R ratio by placing entry closer to the invalidation level.

Exit Rules and Targets

1. Primary target — Measured move equal to the maximum height of the diamond, projected from the breakout point. If the diamond spans from $150 to $130 (height of $20) and the bearish breakout occurs at $135, the target is $115.

2. Secondary target — The origin of the prior trend that led into the diamond. This is the level where the trend began before the diamond formed and often acts as major support or resistance.

3. Trail stop to swing points — Once price has moved 50% toward the primary target, begin trailing the stop to each successive swing high (bearish breakout) or swing low (bullish breakout), locking in profit as the move extends.

4. Invalidation exit — If price re-enters the diamond by more than 3% of the breakout bar’s range after the breakout, exit immediately. The pattern is invalid and a reversal back into the formation is underway.

Target Calculation: Measure from the highest high of the diamond to the lowest low (maximum vertical height). For a diamond top breaking below at $135 with a diamond height of $20, the target is $135 minus $20 = $115. For a diamond bottom breaking above, add the height to the breakout point.

Stop Loss Placement

For a diamond top, place the stop above the highest high of the diamond plus 0.5 ATR. For a diamond bottom, place the stop below the lowest low minus 0.5 ATR. This positions the stop outside the full range of the formation so that routine noise inside the pattern cannot trigger an early exit. A diamond with a height of $20 and a target of $20 below breakout yields a 2:1 minimum R:R when entry is at or near the breakout trendline. If the stop distance relative to target produces less than 1.5:1 R:R, skip the trade.

Practical Example

On the daily chart of AAPL, price rises from $165 to $198 over six weeks — a clear uptrend establishing the reversal context. A diamond top then forms over four weeks. In the broadening phase, price swings from $198 up to $205, then down to $188, then back up to $202. In the contracting phase, price makes a lower high at $197 and a higher low at $191, forming the right-side converging trendlines.

The lower-right trendline sits near $192. On day 22 of the formation, AAPL closes at $190.50 on volume 2.1x the 20-day average — a confirmed bearish breakout. Entry is at the $190.50 close.

Diamond height: $205 high minus $188 low = $17. Target: $190.50 minus $17 = $173.50. Stop: above the $205 high plus 0.5 ATR ($2.50) = $207.50. Stop distance from entry: $17. R:R = 1:1 at the measured move target — acceptable given the secondary target near $165 (the trend origin) at 1.5:1.

On a $40,000 account risking 1% ($400), position size is $400 divided by $17 = approximately 23 shares. If price reaches $173.50, the trade returns $390 — roughly 1% of account.

Best Timeframes for Diamond Patterns

The daily chart is the most reliable timeframe for diamond patterns, producing 64-68% success rates when volume confirms the breakout. Patterns on the daily chart typically take 3-6 weeks to complete, giving the four turning points enough separation to be clearly identifiable. The 4-hour chart produces tradeable diamonds in forex pairs, particularly during major sessions, but requires tighter volume monitoring since forex volume data is tick-based. Weekly charts produce rare but high-conviction diamonds — when one appears on the weekly, the subsequent move can last weeks or months. Below the 1-hour timeframe, noise makes the four turning points ambiguous and pattern reliability drops sharply.

Common Mistakes

1. Calling a broadening formation a diamond too early — A diamond requires both phases. If only the broadening half has formed, the setup does not yet exist. Wait for at least one lower high and one higher low on the right side before drawing the full pattern.

2. Entering on a trendline touch inside the diamond — The entry trigger is a close outside the right-side trendline, not a bounce off the internal trendlines. Trading bounces inside the diamond means fading a pattern that has not yet confirmed its direction.

3. Measuring only the right half for the target — The measured move uses the full diamond height from highest high to lowest low. Using only the contracting half underestimates the target by 30-50%.

4. Applying the pattern without a prior trend — A diamond with no preceding directional move is not a reversal pattern — it is simply a period of volatility. The prior trend is what creates the exhaustion the diamond is measuring.

5. Trading diamonds on timeframes below 1 hour — On 15-minute and 30-minute charts, minor fluctuations create false turning points that appear to fit the pattern but break down at entry. Restrict diamond pattern trades to 4-hour and above.

How to Journal Diamond Pattern Trades

Journal Field	What to Record	Why It Matters
Pattern Type	Diamond Top or Diamond Bottom	Filter reversal pattern results separately from continuation trades
Prior Trend Strength	Distance of move into diamond vs diamond height (e.g., 3.5x)	Higher ratio = stronger reversal context and historically better outcomes
Phase Symmetry	Broadening bars vs contracting bars (e.g., 12 / 10)	Roughly equal phases produce more reliable breakouts
Volume at Breakout	Breakout bar volume as a multiple of 20-bar average (e.g., 2.1x)	Tracks whether volume confirmation correlates with win rate
Entry Type	Breakout close or trendline retest	Identifies which entry approach delivers better average R on this pattern
Diamond Height (ATR units)	Height divided by ATR at breakout (e.g., 3.2 ATR)	Distinguishes large, significant diamonds from minor formations
Outcome vs Target	Reached full target / partial / stopped out	Measures whether the measured move rule holds across the sample

Tracking these fields across 50 or more diamond pattern trades reveals whether phase symmetry or prior trend strength is more predictive for a given instrument, and whether retest entries deliver meaningfully better R:R than breakout-close entries. PipJournal’s custom tagging and pattern filtering make it straightforward to isolate diamond trades and run this analysis without manual spreadsheet work.

Internal links: broadening formation | symmetrical triangle | double top | head and shoulders | rising and falling wedge