Diamond Top



Shape:

The Diamond Top is a bearish reversal pattern that typically forms after an uptrend.
It begins with a broadening formation, where price makes higher highs and higher lows, resembling the left side of a diamond.
This is followed by a contracting formation, where price makes lower highs and lower lows, forming the right side of the diamond.
The pattern indicates initial bullish momentum losing strength, followed by increasing selling pressure, signaling a potential reversal.

Success Rate:
The Diamond Top pattern has a moderate-to-high success rate, particularly when it appears near significant resistance levels.
Success rates can vary, but studies suggest a probability of around 65–70% in predicting a bearish reversal after an uptrend.

Buy:
Not recommended, as the Diamond Top is a bearish reversal pattern.
Aggressive counter-traders may consider buying only if price breaks above the upper boundary of the diamond with strong confirmation, though this is rare.

Take Profit (TP):
Measure the height of the diamond at its widest point (distance between highest high and lowest low).
Project this distance downward from the breakout point (where price breaks the lower boundary) to set the initial take profit target.
Example: If the diamond height is Tk.10 and price breaks down at Tk.100, the target would be Tk.90.

Stop Loss (SL):
Place the stop loss just above the breakout candle or above the nearest swing high within the diamond.
This limits potential losses in case the breakout fails or reverses.

Sell:
Enter a sell position when price breaks below the lower boundary of the diamond.
Confirm the breakdown with increased volume or bearish momentum indicators.

Profit Trailing:
Use a trailing stop to protect profits as the price declines.
Adjust the stop loss downward with new swing highs, keeping it a safe distance above the current market price.

Lot Size:
Determine lot size based on your account balance and risk tolerance.
Ensure that the potential loss (difference between entry price and stop loss) does not exceed 1–2% of your total capital.

Risk-to-Reward Ratio:
Aim for a favorable risk-to-reward ratio of at least 1:2, where potential reward is twice the potential risk.

Leverage:
Use leverage cautiously, as bearish breakouts from a Diamond Top can be volatile.
Understand leverage implications before applying it.

Other Conditions:
Best observed after a prolonged uptrend.
Confirmation with volume increase or other bearish indicators such as RSI divergence or MACD crossovers enhances reliability.
Avoid trading Diamond Tops in sideways or choppy markets, as breakouts may fail.

Caution:
False breakouts are common; always wait for confirmation of the breakout below the lower boundary.
Market volatility and external news events can affect the pattern’s reliability.
Do not rely solely on this pattern—combine it with other technical signals for safer trades.

Pros and Cons of the Diamond Top Pattern

Pros:

  • Clear Reversal Signal: Provides a visual indication of a potential trend reversal from bullish to bearish.

  • Defined Entry and Exit Points: Entry below the lower boundary and stop loss above the breakout candle are straightforward.

  • Works After Strong Uptrends: Most effective at the top of prolonged bullish moves.

  • Quantifiable Targets: The diamond’s height allows traders to project potential profit targets systematically.

Cons:

  • Moderate Success Rate: Can fail if market momentum is strong or in sideways markets.

  • Volume Dependent: Breakout confirmation relies on increased selling volume.

  • Complexity: More difficult to identify than simple candlestick or triangle patterns.

  • Time Frame Variability: Reliability varies with different time frames; requires careful observation.

Trading Psychology of Diamond Top

Formation:

  • Initial Uptrend: Buyers dominate, pushing prices higher and creating higher highs and higher lows (left side of the diamond).

  • Loss of Momentum: The broadening phase reflects increasing indecision, as buyers’ strength slows and sellers start testing support.

  • Contraction Phase: The right side of the diamond forms lower highs and lower lows, indicating sellers gaining control and bulls losing confidence.

Market Sentiment:

  • Buyers’ Weakness: The inability to make new highs signals diminishing buying pressure.

  • Sellers’ Strength: Sellers begin asserting control, pushing prices toward lower lows.

Breakout Psychology:

  • Anticipation: Traders recognize the potential for reversal and prepare to sell on a confirmed breakdown.

  • Volume Confirmation: A surge in selling volume during the breakout reinforces market sentiment and attracts more sellers.

  • Fear and FOMO: Bullish traders may exit positions to avoid losses, amplifying selling pressure.

Post-Pattern Behavior:

  • Validation: Successful breakdown below the lower boundary reassures traders of the reversal, leading to further selling.

  • Profit-Taking: Some traders close early, while others use trailing stops to maximize downward moves.

  • Support Testing: Price often heads toward previous support zones, where traders evaluate continuation or consolidation.

Failure and Risk Management:

  • False Breakouts: Breakdowns may reverse back into the diamond, causing losses.

  • Reevaluation: Traders should combine the pattern with additional bearish indicators before entering positions.

General Tips for Managing Trading Psychology:

  • Patience: Wait for confirmed breakdown before selling.

  • Discipline: Stick to defined stop-loss and take-profit levels.

  • Emotional Control: Avoid panic-selling; follow structured trade rules.

  • Continuous Learning: Monitor other technical indicators and market conditions to enhance reliability.

Understanding the psychology behind the Diamond Top helps traders anticipate market reversals and manage trades effectively.