Diamond Top (Diamond Top) Is a quite strong reversal pattern. The reason for this name is because of the shape of the model, in addition to the trading signals that the model brings as precious as diamonds. Diamond Top is quite similar to the Head and Shoulders model, but thanks to the attractive entry point, traders can maximize profits than the Head and Shoulders model. In this article, we will introduce you to the Diamond Top model and the principles of effective trading with them.
What is Diamond Top?
Diamond Top is a bearish reversal price pattern that appears at the top of uptrends. This model is shaped like two triangles put together, forming a rhombus that looks like a diamond. The pattern is complete when the price drops and breaks out of the range of the quadrilateral.
As mentioned above, if you pay close attention, you will see Diamond Top is quite similar to a reversal pattern head and shoulders. Therefore, many traders view Diamond Top as a variant of this model.
Features of Diamond Top
To identify the Diamond Top model on the chart, you will draw lines connecting the vertices and connecting the bottoms. If they are shaped like a rhombus or almost like a diamond, that's the Diamond Top model. And after being formed, they will emit trading signals when prices fall and break down the lower right edge of the "diamond".
The moving target of the model is equal to the distance from the top to the bottom of the diamond, that is, the distance from point C to point D as shown below.
As mentioned above, this model is easily confused with the head and shoulders so we need to be aware of the differences between the two models.
The picture above is the Diamond model and the Shoulder and Head Shoulder. Looking at the picture on the right, you can see that the trader is trying to force the chart into the shape of his head and shoulders. However, in fact according to the drawing above, the two shoulders are created by the tail of the candle, not the real body. Besides, the candles here fluctuate quite strongly and there is not much difference to be able to identify the top of the head and the 2 shoulders. Therefore, this way of drawing is unreasonable, this is not a head and shoulders model.
Now look at the image on the left, when connecting the top and bottom of the candle together and create a standard diamond pattern. The pattern completes when the red candle, appearing after the Doji, drops and breaks out of the rhombus.
This model is quite reliable. Statistically, 80% of the model cases will end with a downward reversal of the price and up to 95% of the price cases reach the target of the model as described above. However, usually when the price breaks out of a rhombus, the market usually retests its resistance before continuing to decline. Those are suggestions for our trading strategy.
Actual example of Diamond Top model
Below is a chart of USDCAD H1 time frame. As you can see, after a rally, the market has struggled, resulting in a Diamond Topp pattern lasting about 80 candles. With this Diamond Top model, the bottom and the top of the diamond are not in a vertical line but we still accept this shape because the actual development cannot be completely true as in the textbook. The pattern is complete after the price breaks out of the lower right edge of the diamond. As a result, USDCAD plummeted below and touched the price target of the model.
Instruction for trading with Diamond Top model
Entry point command
For the Diamond Top model, we need to focus our attention on the lower right edge of the rhombus, if this line is broken down, we enter the sell order. Of course you need to wait for the candle to complete in order to determine a breakout point, avoiding being trapped by a false breakout. You can see the illustration below, the red circle marks the breakout point and emits a review signal into the sell order.
How to set a stop loss
Although the diamond model has a high success rate, the forex market is a market with lots of unexpected fluctuations so we must always set a stop loss to protect ourselves.
The stop loss in the pattern should be placed above the nearest peak, when the price is still moving in the diamond. The picture below is an example of how to set a stop loss.
Besides, if you feel the market is highly volatile, you can move your stop loss further, placing it on top of the diamond. With this way of setting a stop loss, it is more difficult to stop the loss, but the risk level of the trade will increase slightly.
How to set profit taking
As mentioned above, the minimum profit-taking distance from the breakout point will be equal to the height of the diamond. However, if many traders recognize and trade this Diamond Top model, you will encounter a lot of competition orders in the target area. Therefore, to make sure you can narrow your profit-taking points by a few pips.
summary
Diamond Top model Rarely appear but once you see this model on the chart, you should never miss the opportunity to trade with them because the probability of success is quite high. But remember, to ensure safety, you need to properly identify the characteristics of the model, adhere to the principles of entry, stop loss and take profit. Opposite to Diamond Top is the Diamond Bottom model with similar but opposite characteristics (increase versus decrease, sell versus buy). Good luck!
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Author: Tin Nguyen
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