Shape:
The Diamond Bottom is a bullish reversal chart pattern that typically forms at the end of a downtrend.
It resembles a diamond shape on the price chart, starting with a broadening formation (price volatility increases) and narrowing into a symmetrical triangle.
The pattern consists of multiple candles forming higher lows and lower highs within the diamond structure, showing initial indecision that gradually resolves into bullish momentum.
This pattern indicates that the selling pressure is fading, and buyers are preparing to take control, signaling a potential trend reversal.
Success Rate:
The Diamond Bottom pattern has a relatively high success rate when it forms near strong support levels and is confirmed by a breakout with high volume.
Studies suggest that this pattern has a success rate of around 65–70% in predicting a bullish reversal.
Buy:
Enter a buy position when the price breaks above the upper trendline of the diamond pattern.
Confirmation with increased volume strengthens the validity of the breakout.
Ideally, wait for a candle close above the breakout line before entering.
Take Profit (TP):
Measure the vertical height of the diamond at its widest point and project this distance upwards from the breakout point to set the initial take profit target.
Example: If the height of the diamond is Tk.10 and the breakout occurs at Tk.50, the target would be Tk.60.
Stop Loss (SL):
Place the stop loss slightly below the breakout point or the lowest point of the diamond pattern.
This limits potential losses if the breakout fails or the price reverses.
Sell:
Selling should be considered if the breakout fails and the price falls back into the diamond structure.
Also, consider taking profits if the price reaches the projected target or shows signs of reversal.
Profit Trailing:
Use a trailing stop to secure gains as the price moves higher.
Adjust the stop loss upward according to swing lows or a fixed percentage/taka amount below the current price.
Lot Size:
Determine the lot size based on your risk tolerance and account size.
Ensure that the potential loss does not exceed 1–2% of your total account balance.
Risk-to-Reward Ratio:
Aim for a favorable risk-to-reward ratio, ideally 1:2 or higher, where the potential reward is at least twice the risk.
Leverage:
Use leverage cautiously. While leverage can amplify gains, it also increases potential losses, particularly if the breakout fails.
Other Conditions:
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Confirm the breakout with strong volume, indicating genuine buying interest.
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Diamond Bottom patterns are more reliable at major support levels and after prolonged downtrends.
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Combine with other bullish signals like RSI divergence or MACD crossovers for additional confirmation.
Caution:
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False breakouts are possible, especially in volatile or sideways markets.
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Avoid trading without confirmation from volume or other supporting indicators.
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If the breakout fails, reassess the market before entering another trade.
Pros and Cons of the Diamond Bottom Pattern
Pros:
Bullish Reversal Signal:
Provides a clear signal of potential trend reversal at the bottom of a downtrend.
High Success Rate:
Relatively reliable when confirmed with volume and formed near strong support levels.
Clear Entry and Exit Points:
Breakout above the upper trendline serves as entry, and the lowest point of the diamond serves as a stop-loss reference.
Quantifiable Targets:
Height of the diamond provides a systematic way to calculate profit targets.
Cons:
False Breakouts:
Breakouts can fail, especially if volume is weak, leading to potential losses.
Complex Structure:
The diamond shape can be subjective and harder to identify compared to simpler reversal patterns.
Market Dependency:
Most effective in stable downtrends; less reliable in choppy or sideways markets.
Short-Term Nature:
Targets derived from the diamond may be suitable for short- to medium-term trading only.
Trading Psychology of Diamond Bottom
Formation:
Initial Downtrend:
The pattern forms after a prolonged downtrend, with sellers dominating the market.
Volatility Expansion:
The price initially moves in a broadening manner, reflecting indecision and struggle between buyers and sellers.
Consolidation:
The narrowing phase of the diamond shows decreasing selling pressure and growing buyer interest.
Reversal Confirmation:
The breakout above the upper trendline signals that buyers have gained control, reversing the previous downtrend.
Market Sentiment:
Buyers’ Confidence:
The breakout reassures buyers that the market is turning bullish, prompting additional buying.
Sellers’ Weakness:
Sellers fail to maintain downward momentum, signaling exhaustion and a potential trend change.
Breakout Psychology:
Anticipation:
Traders who recognize the diamond pattern prepare to buy upon breakout confirmation.
Volume Increase:
A strong volume breakout validates the reversal and encourages additional participation.
FOMO (Fear of Missing Out):
Traders rush to enter long positions as the breakout occurs, further pushing prices upward.
Post-Reversal:
Validation:
Sustained price movement above the breakout point confirms the reversal, attracting more buyers.
Profit-Taking:
Some traders may take partial profits at calculated targets while letting the remainder run.
Trailing Stops:
Experienced traders use trailing stops to protect gains while allowing room for further upside.
Failure and Risk Management:
False Signals:
If the breakout fails, traders face potential losses, highlighting the importance of proper stop-loss placement.
Reevaluation:
Failed breakouts prompt traders to reassess market conditions and seek alternative setups.
General Tips for Managing Trading Psychology:
Patience: Wait for breakout confirmation before entering trades.
Discipline: Follow a structured plan including entry, exit, and stop-loss levels.
Emotional Control: Avoid panic reactions and focus on strategy.
Continuous Learning: Combine technical patterns with volume and momentum indicators for better reliability.
Understanding the psychology behind the Diamond Bottom pattern helps traders anticipate bullish reversals and make more informed trading decisions.