The Diamond pattern is one of the rarest and most powerful reversal patterns. It forms at significant market tops (Diamond Top) or bottoms (Diamond Bottom). The pattern looks like a diamond or rhombus shape โ it begins with a Broadening Formation (expanding range) and then transitions into a Symmetrical Triangle (contracting range), creating the distinctive diamond shape.
Diamond Top Pattern Diagram
Broadening left side + Contracting right side = Diamond | Breakdown below lower trendline = Entry
Formation Stages
| Phase | Shape | Meaning |
|---|---|---|
| Phase 1 (Left half) | Broadening โ higher highs, lower lows | Market uncertainty โ bulls and bears fighting |
| Phase 2 (Right half) | Contracting โ lower highs, higher lows | Consensus emerging โ one side beginning to win |
| Breakout | Price exits the diamond | Winner determined โ strong directional move begins |
Trading the Diamond
Diamond Top (Bearish):
Entry: Short when price closes below the lower right trendline
Stop Loss: Above the right side apex of the diamond
Target: Height of the diamond measured downward from breakout
Diamond Bottom (Bullish):
Entry: Long when price closes above the upper right trendline
Stop Loss: Below the right side apex
Target: Height of diamond measured upward from breakout
Entry: Short when price closes below the lower right trendline
Stop Loss: Above the right side apex of the diamond
Target: Height of the diamond measured downward from breakout
Diamond Bottom (Bullish):
Entry: Long when price closes above the upper right trendline
Stop Loss: Below the right side apex
Target: Height of diamond measured upward from breakout
Diamond patterns at NIFTY all-time highs are extremely significant. The expanding volatility of the left side (the Megaphone phase) combined with the narrowing of the right side (the Triangle phase) creates a pattern where the eventual breakdown has maximum momentum behind it. These breakdowns often lead to corrections of 15โ25%.
