Dear friends, trading offers us tremendous opportunities to achieve our financial goals. At the same time, the sustainability of financial trading makes traders financially free. Research shows that most successful traders attain financial freedom. By making your own decisions and taking a long-term approach in financial markets, you can support your personal development and take steps toward economic independence. Trading with your own strategies, managing your profits, and building your future on solid foundations is a highly rewarding approach. When combined with the right strategies and discipline, trading becomes not just a way to earn profits, but a tool that can transform your life. At this point, technical analysis tools can greatly support our trading. One of these tools that we will now focus on is the Diamond Bottom Pattern.
What is the Diamond Bottom Pattern?
There are many trend reversal patterns in trading the
financial markets. One of these, which is rarely seen on price charts but has a
great impact, is the Diamond Pattern. There are two types of Diamond Patterns:
one is the Diamond Top pattern, and the other is known as the Diamond Bottom
pattern. As the name suggests, this article will focus on the Diamond Bottom
pattern.
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| Diamond Bottom Chart Pattern |
So, what is the Diamond Bottom Pattern? If you ask this
question, we can provide the following answer: "The Diamond Bottom Pattern
is a reversal pattern that forms during a downtrend. It appears at the end of a
downtrend and signals the beginning of an uptrend. In this way, the bear market
comes to an end, and the bull market begins." This pattern is a rare and
effective one that can help you get ahead in the market, especially with its
reversal signals at the end of downtrends. The Diamond Bottom pattern is not
just a technical analysis tool, but also offers deep insights into market
psychology. This pattern usually forms during periods when trading becomes
indecisive and uncertainty increases. As the market is in a downtrend, it
gradually loses momentum and eventually experiences a pause. During this time,
the Diamond Bottom pattern emerges, indicating that traders share a common
belief that the market is about to change direction. This leads to noticeable
market movements, driven by herd mentality. Trend followers can closely observe
this pattern to better understand market psychology and adjust their positions
accordingly.
How Does the Diamond Bottom Pattern Form?
The Diamond Bottom pattern emerges in bear markets. After
some time, the bears struggle to push prices lower, leading to uncertainty, and
volatility can be observed in price movements. The upward and downward
movements of prices slowly increase. In other words, in the first phase of the
Diamond Bottom pattern, prices start to expand. This indicates that the upper
and lower lines of the prices are widening. Normally, by the middle of the
pattern, this expansion stops, and a contraction begins. That is, the support and resistance levels move closer to each other. The initial expansion and
subsequent contraction of price movements create a diamond shape on the price
chart. This is why the pattern is called the Diamond pattern. To summarize
briefly, the following components can be more clearly distinguished in the
formation of the pattern:
1. The Expanding Part: At the beginning of the pattern,
prices start to expand during the downtrend. This expansion means that the
support and resistance lines are moving away from each other. Prices exhibit
high volatility, meaning that the price ranges increase. On the chart, the
lower and upper boundaries move in opposite directions, creating an expanding
triangle appearance.
2. The Contraction Part: At the exact midpoint of the
pattern, the expansion stops, and price movements begin to contract step by
step. During this process, price ranges shrink, and support and resistance
levels move closer to each other. Prices move within a narrower band, creating
a compression zone. On the chart, the lower and upper lines approach each
other, forming a contracting triangle appearance.
3. Completion of the Diamond Shape: The resistance line
created by the upper price levels forms the upper edge of the diamond after
expanding and then contracting. Similarly, the support line formed by the lower
price levels also expands and then narrows to form the lower edge of the
diamond. This expansion followed by contraction creates the diamond shape on
the price chart.
The Diamond Bottom pattern forms a shape on the chart that
resembles a diamond or a wedge due to the prices first expanding and then
contracting. This pattern is not always perfectly symmetrical and typically has
an asymmetric structure. In other words, it is not possible to find a precise
geometric arrangement, but when the expansion and contraction movements of the
prices come together, a pattern that resembles a diamond appears on the chart.
How to Trade the Diamond Bottom Pattern?
Technical tools, such as chart patterns, directly influence
our buy and sell signals. Chart patterns are technical tools that guide our
trading strategies in financial trading. Through these patterns, we can predict
future price movements. The Diamond Bottom pattern is one of these tools. When
we see this pattern on charts, bear market supporters may be disheartened,
while bull market supporters are pleased, as the Diamond Bottom pattern signals
the beginning of a transition to a bull market. For this reason, the pattern is
also known as a "bullish reversal pattern."
When trading based on the Diamond Bottom pattern, we should
first wait for the pattern to be fully completed. Once the price compression
ends, a strong upward breakout usually occurs. This breakout indicates that the
pattern is complete and an uptrend has begun. After this, the breakout needs to
be confirmed. A full candle close above the breakout point is expected.
Additionally, it is important to ensure that other technical indicators are
signaling in the same direction. When all these conditions are met, it is
preferable to take a position in the direction of the breakout. When using the
Diamond Bottom pattern in trading, correct timing for entry, setting a
stop-loss level, and accurately determining target price levels are crucial for
a successful strategy.
Entry (Buy): A position is opened after the pattern is
completed and an upward breakout occurs, provided that this breakout is
confirmed by trading volume.
Confirmed Entry: For a more cautious approach, you can
obtain confirmation by ensuring that prices do not return to the diamond
pattern after the breakout (i.e., prices do not revert to the breakout point).
Confirmed entry is useful for avoiding false breakouts.
Stop Loss: Stop loss is one of the essentials in financial
trading. Typically, the stop loss level is placed just below the lowest point
of the Diamond Bottom pattern.
Target: When determining the target price level, the height
of the Diamond Bottom pattern, that is, the widest price range, should be
considered. The trade target is usually calculated based on this distance. The
target price is determined by adding the distance of the widest part of the
pattern (price difference) to the breakout point. This distance is referred to
as the height of the pattern. If you are taking a long-term position, you can
use this height as the primary target. However, it is also useful to consider
previous resistance levels when setting further targets. You can also use
additional technical analysis tools, such as Fibonacci extension levels, to
determine larger targets.
An example of the Diamond Bottom pattern appears on the
4-hour price chart of the Euro/Australian Dollar (EUR/AUD) currency pair. This
pattern formed at the end of a downtrend and, after completion, an upward
breakout initiated an uptrend. On the chart, the entry point, stop loss level,
and target points are clearly shown. The Diamond Bottom pattern, a bullish
reversal pattern, is a rare structure on price charts. However, when it forms,
it can offer highly effective trading opportunities.
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| Diamond Bottom Pattern on EUR/AUD 4-Hour Price Chart |
Important Note: The information shared in this article
provides a general overview to help you better understand the Forex market and
is intended for informational purposes only. It should not be considered as
investment advice. However, remember that forex trading is risky, and no
investment is guaranteed. Technical analysis tools like the Diamond Bottom
pattern can sometimes be misleading. Therefore, you should support such
patterns with other technical tools and not ignore fundamental factors.
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