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Let me be clear about this: I don’t like diamonds. They are as tough to spot as night crawlers in
the grass on a summer night. Most often, you’ll find diamond bottoms in a bull market with an upward breakout, but
those in a bear market rank second for overall performance in part, I think, because I found so few. A redeeming
quality of diamond bottoms is that a quick rise often follows a quick decline. For more information see pages 179 to
195 of the book Encyclopedia of
Chart Patterns, Second Edition and read the following...
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Score your chart pattern for
performance by clicking
here |
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 8 out of
23; 1 out of 21
Break even failure rate for up/down breakouts: 4%; 10%
Average rise/decline: 36%; 21%
Throwback/pullback rate: 53%; 71%
Percentage meeting price target for up/down breakouts: 81%; 63%
Identification Guidelines
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Characteristic |
Discussion |
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Price trend |
Downward leading to the pattern |
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Shape |
Looks like a diamond but usually
one tilted to the side. |
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Trendlines |
Prices form higher peaks and
lower valleys (a broadening pattern) in the first part of the pattern, then price action narrows with lower peaks and higher
valleys. Trendlines outline many of the peaks and valleys, forming a diamond shape. |
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Touches |
Prices will touch each trendline
once or twice. Don’t worry if your lines cross some of the price outliers. |
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Volume trend |
Downward trend 66% of the
time. |
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Breakout |
Upward 51% of the time. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
See the measure rule figure to the right. Compute the height from the
highest peak (A) to the lowest valley
(B) in the pattern and then multiply it by the above
“percentage meeting price target.”
Add it (upward breakouts, point A) or subtract it
(downward breakouts, point B) from the breakout
price to get the price target (C).
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Price trend |
See the price trend figure to the right. If price makes a quick, nearly
vertical drop (A) leading to the diamond and the
breakout is upward, expect price to recover back to the price at which it started
the plunge (B). Also, price must have something to
reverse. Diamonds with short-term (less than three months) price trends leading
to the diamond perform best postbreakout. |
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Half staff |
See the half staff figure to the right. If the diamond
acts as a continuation pattern, meaning that price exits (C to D in the same direction as
it entered the pattern (A to B), then the diamond can act as a half-staff
pattern (half the move is still ahead). The move after the breakout (CD) will often fall
short, so look for overhead resistance
or underlying support where price might stall. |
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Price velocity |
High velocity moves after
the pattern often follow high velocity moves leading to the pattern. |
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Yearly low |
For best performance, diamonds with
breakouts within a third of the yearly low perform best. |
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Volume trend |
A rising volume trend results in
the best postbreakout performance. |
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Throwbacks and pullbacks |
Throwbacks and pullbacks hurt postbreakout
performance. |
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 The Measure Rule
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 Price Trend
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 Half Staff
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Example
The above figure shows an example of a diamond bottom chart pattern. Many times the diamond chart pattern is skewed
or pushed to one side, making diamonds difficult to spot. In this example, outliers A and
B hide the diamond shape.
Notice that price at D tries to climb back to the launch point A but does not quite make it. That is typical behavior so plan accordingly when you trade. This diamond bottom also
shows a U-shaped volume pattern.
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