What Is A Diamond Top Chart Pattern?
In technical analysis, a diamond top pattern is a bearish price reversal chart pattern that forms on the price charts of financial markets at the end of a bullish trend or near a market top. It signals that the price of a market will reverse from bullish and rising prices to bearish and declining prices.
A diamond top pattern is shaped like a diamond at the market top of a bullish trend on a price chart.
Diamond Top Pattern Components
In order to identify a diamond top pattern, there are four components that need to be visible on the price chart of a financial market.
The four components of a diamond top pattern are:
- Upward sloping resistance on the left side: This is the upward sloping resistance on the left-hand side of the diamond top pattern. It connects the higher swing highs in the prices together.
- Downward sloping resistance on the right side: This is the downtrending resistance level on the right-hand side of the pattern that connects the lower swing highs in the prices together.
- Downward sloping support level on the left side: This is the downtrending sloping support level on the left-hand side of the diamond top pattern that connects the lower swing lows of the prices together.
- Upward sloping support level on the right side: This is the upward sloping support level on the right-hand side of the pattern that connects the rising swing highs in the prices together. A trader will typically use a break down of this level as a short entry trigger.
Diamond Top Chart Pattern Examples
Below are visual examples of the diamond top chart pattern.
Example Of A Diamond Top Pattern In The Stock Market
On the daily price chart of Apple stock, a diamond top pattern formed. It signaled that the price of Apple stock had reached a market top and the price swiftly reversed from bullish to bearish price action.
Example Of A Diamond Top Pattern In The Forex Market
On the daily price chart of the EUR/USD currency pair, a diamond top pattern formed.
Originally the price of the currency pair was in a bullish trend with increasing price.
Once the pattern formed, the price breaks down into a bearish trend and decreasing prices.
Example Of A Diamond Top Pattern On A Shorter Timeframe Price Chart
On the 1-minute price chart of Apple stock, a diamond top pattern formed. Before the pattern formed, the price of Apple stock was in a short-term bullish trend.
The price formed a diamond top pattern and then reversed from a bullish trend to a bearish trend with declining prices.
Example Of A Diamond Top Pattern On A Higher Timeframe Price Chart
On the weekly price chart of the S&P500 index, a diamond top pattern formed.
The price was originally in a bullish uptrend before the pattern formed. After the pattern formed and the price of the market breaks down, it results in a bearish trend for many months.
How To Find Diamond Top Patterns
The methods for finding a diamond top pattern in the market are:
- Browse manually through price charts: A trader can manually browse through the price charts of the markets to find diamond top patterns.
- Use a diamond top pattern scanner: Use a technical analysis chart pattern scanner to find diamond top patterns in the market.
Diamond Top Pattern Benefits
The benefits of the diamond top pattern are:
- It helps to find bearish price reversals in the market: A diamond top pattern helps traders to find shorting opportunities in the markets.
- It offers low-risk short entries: A diamond top pattern offers a short entry in a low-risk area with the potential for a large bearish move lower. This means the risk-reward ratio is high.
- It can be applied to any market on any timeframe:A diamond top pattern can be used and applied to any market and on any timeframe and it is not restricted to just a few.
- It can help understand if a bullish trend is ending: A diamond top pattern can help a trader to take profits on any bullish trades as the pattern signals that the bullish trend is ending and that the price will reverse.
Diamond Top Pattern Limitations
The limitations of the diamond top pattern are:
- They rarely form on price charts: A diamond top pattern very rarely forms on a price chart compared to other patterns. This means will take very few short trades with this pattern as it’s so uncommon to find.
- They can be hard to spot: The diamond top pattern can be hard to find in a market, especially if the markets are volatile and choppy. A diamond pattern is not always shaped in a perfect diamond shape. This can sometimes confuse new traders.
Diamond Top Formation Duration
The length of time a diamond top pattern takes to form will depend on the timeframe of the price chart used.
Example length of time for a diamond top pattern to form based on different timeframes include:
- A minimum of 60 minutes for a diamond top pattern to form on a 1-minute price chart.
- A minimum of 60 days for a diamond top pattern to form on a daily price chart.
- A minimum of 60 weeks for a diamond top pattern to form on a weekly price chart.
Frequently Asked Questions About The Diamond Top Pattern
Below are frequently asked questions about the diamond top chart pattern.
Is A Diamond Top Pattern Bullish?
No. A diamond top pattern is a bearish reversal signal. It indicates that the price of a market will decline and go lower.
Is A Diamond Top Pattern A Continuation Pattern Or A Reversal Pattern?
A diamond top pattern is a price reversal pattern. It signals that the price will reverse from a bullish trend to a bearish trend. It is not a continuation pattern.
What Price Chart Timeframes Can A Diamond Top Pattern Form On?
A diamond top pattern can form on any timeframe price chart from as low as a 1-minute price chart to much higher timeframe weekly and monthly price charts.
What Does A Diamond Top Pattern Tell You?
A diamond top pattern tells a trader that the bullish trend and increasing prices are about the end and that the price of a market may soon reverse from increasing prices to decreasing prices.