Diamond Bottom Patterns Guide: How To Identify, Analyze, Trade, & Profit

Diamond bottom chart patterns are reliable but fairly rare and nuanced.

Chart patterns are one of the most popular forms of technical analysis.  That’s unsurprising, considering how easy they are to understand and trade.  Not to mention, they work with virtually all tradable assets.

In this Diamond Bottom Pattern Trading Guide, we’ll dive DEEP on:

• How They Work
• What They Mean
• Components & Criteria
• Where They Fit
• Their Psychology
• How To Chart Them
• How to Trade Them
• Similar Chart Patterns

First, let’s start with the basics.

What Is a Diamond Bottom Chart Pattern?

A diamond bottom (or, “bullish diamond”) is a compound bullish chart pattern that consists of a broadening pattern followed by a triangle pattern.  Price undergoes a two-phase consolidation between widening then narrowing trend lines that looks like a diamond.  It is most commonly used as a bullish reversal signal.

Diamonds are one of the more unique types of chart patterns.  Of course, the diamond bottom has an exact opposite in the diamond top pattern.  Aside from that, it shares some commonalities with other multi-phase patterns.  Otherwise, there aren’t too many patterns like it.

On the charts, diamond bottoms are sometimes confused with head and shoulders patterns.  However, these patterns use different concepts, criteria, and trading targets.

As with all chart patterns, they are more a suggestion than promise.  You should never look at them as guarantees!

However, they can still help you make money if you know how they work.

How Diamond Bottoms Work

Diamond bottoms arise due to a fairly rare scenario.

They begin when price falls to a new swing low.

From there, the pattern develops in two phases.

During the first phase, price goes into discovery mode.  It oscillates up and down in an expanding range, exploring support and resistance levels.  Still far below the last major swing high, price creates a series of diverging peaks and valleys in a broadening pattern.

During the second phase, volatility cools as price consolidates.  Now, price’s oscillations converge on each other as the peaks and valleys get closer and closer together.  To anyone watching, the triangle pattern becomes obvious.

This happens in such a way that you can draw a rough diamond around the consolidation zone.  Along the top, you have two resistance lines, the first ascending and the second descending.  Along the bottom, you have two support lines, the first descending and the second ascending.

As the second phase matures, any candle close outside the pattern sets up a breakout trade in that direction.  Bullish ones are seen as the main opportunity, with diamond bottoms breaking up 74% of the time according to Thomas Bulkowski’s Encyclopedia of Chart Patterns.

You can trade diamond bottoms in stocks, forex, cryptocurrency, and most other markets.  They appear across a variety of time frames, if infrequently.  And while they are not as easy to identify as other patterns, they are still fairly easy to spot.  You just need to know what you’re looking for.  As such, they are a great signal for beginner traders to explore.

This begs the question, then, what do they actually mean?

What Diamond Bottom Signals Mean

Diamond bottoms represent a period of indecision (and potential accumulation).

In other words, the downward momentum appears to have stalled out.  At first, whipsawing increases as price tests local support and resistance.  After several short-term swings the range grows tighter again.  Both buyers and sellers settle into new positions, with more optimism to the upside.

If the bulls can generate enough buying pressure, they can ensure a new uptrend.

As the diamond bottom pattern continues, volatility contracts and price consolidates.  But that can’t last forever.  The converging trend lines are guaranteed to bring things to a head.

Diamond bottoms form during downtrends most often.  When they do, they tend to signal reversal (and perhaps even help form longer-term bottoms).  They form less frequently during uptrends, but may signal continuation when they do.

They are a classic bullish chart pattern, after all.

In this way, diamond bottom patterns imply a bullish bias but do not seal a bullish outcome.  They show supply and demand balancing out within a tightening range.  More often than not, they play out as accumulation patterns, with bulls able to retake control.

Before you can identify diamond bottoms, however, you need to understand their makeup.

So let’s take a look at how they are made.

Diamond Bottom Pattern Components & Criteria

Diamond bottoms have several parts.

Some remain static throughout the pattern.  Others develop as price changes over time.

Most components have specific criteria.  Understanding these rules is especially important for compound patterns like this one.  Still, some of them are more like guidelines while others are mandatory (must vs should).

If the pattern does not meet these requirements it is invalid.  The trend lines may still hold some weight but the price target and overall bullish reversal signal no longer do.

Therefore, it is crucial you make sure all the pieces are in the proper place.

Phase 1: Broadening Pattern

The broadening pattern (or “megaphone” pattern) reveals a bit of uncertainty.  Price can’t decide whether it wants to surge lower or retrace the original sell-off—and ends up doing both.  From the bottom of that sell-off, it makes both short-term higher highs and lower lows.  As time goes on, volatility increases heading into phase two of the diamond.  When trading broadening patterns in isolation, you’d want at least five total touches of the rising resistance and falling support lines.  However, we need to be a little more lenient when trading compound patterns.

Criteria: The first support line must have a negative slope and connect at least two swing lows.  The first resistance line must have a positive slope and connect at least two swing highs.

Phase 2: Triangle Pattern

The triangle pattern that forms after the megaphone brings the pattern to a conclusion.  Price coils back in on itself, transitioning to a period of lower highs and higher lows.  Any type of triangle could work here—symmetrical, asymmetrical, ascending, or descending.  And just like with phase one, we can make some exceptions with the requirements for the triangle itself.

Criteria: The second support line must have a positive slope and connect at least two swing lows.  The second resistance line must have a negative slope and connect at least two swing highs.

(Projected) Apex

The intersection of the phase 2 trend lines is the “end” of the pattern.  However, the vast majority of converging patterns will break out before price ever reaches this point.  A common rule of thumb is that patterns become more likely to see a resolution once they become 60–70% “full.”  However, diamond patterns seem to get closer to their apex than most other patterns.  It could be that they become more likely to break out at 60–70% of the triangle as opposed to 60–70% of the whole pattern.  Conventional wisdom also states breakouts grow more violent as triangles grow more full (though this does not necessarily imply a more aggressive price target).

Price Target

The most common diamond bottom price target you’ll see is based on the distance from the highest close to the lowest close in the pattern.  Some traders, however, prefer to use the total height of the pattern.  Either way, add or subtract this distance from the breakout point to the get price target.  By this measured move rule, taller diamond bottoms usually have larger targets.  Bullish targets fall over time, with the descending resistance line.  Bearish targets rise over time, with the ascending support line.

Example: A diamond bottom has a range of $8.00 to $10.00 from lowest low to highest high, giving a $2.00 price target.  The phase two triangle apex is at $9.00.  The upward target will fall from $12.00 (a 20% gain) to $11.00 (a 22% gain) as the pattern matures.  The downward target will rise from $6.00 (a 25% loss) to $7.00 (a 22% loss).

Internal Price Swings

As diamonds develop, price oscillates between support and resistance.  Not every swing will make it to one of the two main trend lines.  But patterns with a lot of empty space are seen as less reliable.  In this way, ranging price action adds validity. These shorter-term trends also open the door for swing trades.  These opportunities are most prevalent through the middle of the pattern, when price swings are largest.

Criteria: Internal price swings should fill the diamond in an approximate sawtooth pattern.

Trend Line Tests

Every test of support or resistance is a bit of a battleground.  Sure, these tests are important for pattern validity.  However, each is a potential breaking point, with progressively higher stakes as the pattern matures.  Scalp traders may celebrate the volatility spikes.  But others look on with baited breath.  Diamond patterns require more tests than other patterns, since there are four trend lines.  Each trend line has to connect at least two points.  This creates a minimum of 6–8 tests, depending on how the diamond is structured.  This high bar is part of the reason we can be more relaxed with some of the overall requirements.

Criteria: Each support and resistance line must be tested at least twice, resulting in a minimum of 6–8 tests total.  More successful tests are generally seen as an omen of higher reliability.

Fakeouts

The true breakout is often preceded by one or more false breakouts, or fakeouts.  These fleeting moves burst through one of the trend lines then trade back inside them shortly thereafter. Fakeouts may shatter the structure and invalidate the pattern completely. Or, they may only require a bit of redrawing or zooming out. They could be a sign of an appetite for action at higher or lower prices.  Or, they could be the byproduct of a stop hunt.

Breakout & Breakout Point

The breakout is the reason everyone comes to the party in the first place.  It’s where the fun truly begins.  If the price breaks up, we call the diamond bottom successful.  If it breaks down, we call it a failure.  From this point, it stays above or below the formation for good.  All that’s left is to see how far it goes.

Criteria: The breakout must close outside the pattern and stay outside the pattern.  At the very least, it cannot close below the original resistance line.

Pullback (& Retest)

Pullbacks after the breakout are the norm, but not an inevitability.  They can be deep or shallow, immediate or delayed.  Full retests of the breakout line are common, but not guaranteed.  Most patterns perform better without them.  This is true of both upside and downside breakouts.

Criteria: The pullback must not close below the resistance-turned-support line.  If it does, it invalidates the breakout.

Trading Volume

Volume is one of the most cited chart pattern validation and confirmation factors.  Traders expect increasing volume during the breakout.  Low volume on a breakout may be indicative of a fakeout.  For most patterns, they also expect decreasing volume over the course of the pattern itself.  However, broadening patterns typically form with expanding volume.  So as whole, the ideal diamond bottom volume profile may be a bit more murky.

Criteria: Trading volume should expand alongside the breakout.  Ideally, there would be a large volume spike followed by elevated volume until the target is met.

Where Diamond Bottoms Fit in the Chart Narrative

The markets are often characterized as a battle between the bulls and the bears.

It’s like the charts have a story to tell.

Patterns are a natural progression from market cycles, trends, and price levels.  They also build on the data from candlesticks and candlestick patterns (even though you can usually see them on a line chart).

However, chart patterns have an even larger impact on the chart narrative.

That’s partly because they tend to span longer periods of time and therefore carry more weight.  But it is also due to their popularity.  Patterns attract a lot of attention because so many people know about them.  The extra interest often generates unexpected outcomes.

Admittedly, diamonds are less common and less well-known than most patterns.

Nonetheless, they can still generate dramatic pieces of price action.

Diamond Bottom Market Psychology

The diamond bottom is a visualization of the psychology of the market.

It illustrates that the balance between the bulls and the bears may be shifting.

Imagine this scenario:

You can picture this scenario anytime you see price movements create a rhombus shape along the bottom of the trend.  It could apply to any tradeable asset.  However, no two diamonds will have exactly the same story.  Nor will they play out in exactly the same way.  But true traders consider what both sides are thinking.

The frequency and performance of diamond bottoms varies across markets.  So study their historical performance on your preferred asset(s) and time frames specifically.

How To Chart Diamond Bottom Patterns

Before you can analyze diamond bottoms, you need to be able to chart them.

Luckily, all you really need is basic chart markup skills.

They are very easy to draw with trend lines and/or extended trend lines on TradingView.  You could also use the triangle tool or triangle pattern tool to highlight either side of the diamond, but that’s probably unnecessary.  Lines are more than adequate to map out all the important levels and decision zones.

Then, analyze the ascending triangle pattern with your favorite trading indicators and tools.

You may need to adjust or redraw your lines several times.  It can be a bit like looking for pictures in the clouds.  A broadening wedge that fails to break out can evolve into a diamond.  Then, that original broadening wedge may go on to remain active even after the diamond resolves.

That’s why each pattern’s criteria is so important.

Like all technical analysis tools, chart patterns are just a framework for understanding price action.

You’ll need more in your arsenal to consistently make money with them.

How To Trade Diamond Bottom Patterns

The basic concept for trading diamond bottoms is very easy to understand.

As with all diamond patterns, you can get in on a breakout trade on either side of the formation.

The conventional bullish trade is:

1. Step 1: Take a long trade if/when the price closes above the falling resistance line.
2. Step 2: Place your stop loss just below the breakout point.
3. Step 3: Set your profit target by adding the diamond’s high-low range to the falling resistance line at the breakout point.

The conventional bearish trade is:

1. Step 1: Take a short trade if/when the price closes below the rising support line..
2. Step 2: Place your stop loss just above the breakdown point.
3. Step 3: Set your profit target by subtracting the diamond’s high-low range from the rising support line at the breakout point.

The clarity of these rules makes for a very tradeable pattern.

Plus, there are many things you can do to optimize its use.

Still, you probably shouldn’t aspire to be a “pattern trader.”  Learning to use patterns is a great place to start. But you’ll eventually want (or need) to move on to more sophisticated strategies.  These may use patterns, but not as the centerpiece.  Luckily, traditional chart patterns are easy to integrate into many different trading styles.

A reliable trading strategy requires a dependable edge and calculated risk management.  Learn trading math and order types well.  Add some options and/or automation if you really want to cook.

However you choose to do your diamond bottom trading, keep your rules strict.

Signals mean nothing without proper trade execution.

Step 1: Where & How To Enter Diamond Bottom Trades

By now, you should understand the basic entry.

You have multiple options to play the breakout straight.

You could watch the pattern and place a market order on the candle after the breakout.  Or, you could forgo the candle watching by implementing price and/or volume alerts.  You could even place a stop limit to buy the breakout automatically (though that does have its own risks).

Yet there is more you can do to get the best entry possible.

 Entries

The most logical way to get a higher percentage profit is to buy tests of the lower trend line before the breakout.  Even if you enter on one of the final tests of the lower support line, it will increase your potential gains.  It could also enable a break-even stop loss below the final breakout point later on.  Just keep in mind, it could open you up to more risk.

Swing Into Position

If you can catch their often rapid reversals, diamonds present great swing trading opportunities.  They usually offer up one or two relatively big plays when the range is at its tallest.  As the pattern nears maturity, you may find yourself in a profitable position before the breakout.  This gives you options.  You could take profits at resistance like usual.  You could hold on for the break out.  You could even do a little bit of both.  And again, you still have the same break-even stop loss option as the typical early entry.  However, this method is fairly advanced.  It is probably best left for experienced swing traders who can properly weigh the risks and opportunity costs against their trading style.

Considered Confirmation

Where you assign confirmation can make a big difference to your risk/reward ratio.  Volume, higher-term candle closes, candlestick patterns, and indicator signals are all legitimate options.  Some traders may even wait to buy the retest of the resistance-turned-support line or the final apex.  Ideally, you’d back up your own choice with historical analysis.

Playing the “Fail”

Diamond bottoms that break down are almost as easy to trade as successful ones.  Assign the measured move to the bottom of the breakout point, and you have your bearish price target.  If price hits this target, it will result in lower highs and lows, clinching another leg in the downtrend.  And as they say, “the trend is your friend,” so there could be even more downside beyond the target.  In this way, failed diamond bottoms have nearly as much long-term potential as successful ones.

Step 2: Where & How To Exit Diamond Bottom Trades

You already know the price targets on both sides.

In fact, everyone knows them.  Despite the relative obscurity of diamond patterns, all traders know about triangles.  And since the second phase is a triangle, there will be a lot of eyes on the trade.  What’s more, triangles are among the easiest-to-program patterns.  This means more overall trading activity.  Altogether, this can be a recipe for both under underperformance and overperformance.

That’s just one reason why it’s crucial to know your gameplan going into every trade.

Frontrunning

Overhead resistance may stall price, or prevent it from reaching the target altogether.  Make note of prior levels, important moving averages, and other potential obstacles (ie. phase 1’s rising resistance level).  Conservative bulls may take profits here.  Aggressive bears may look for shorts.  Both of these exert pressure against the breakout.  In response, you could consider locking in some or all your gains here too.  Identify these levels and establish your contingency plans in advance.

Staying Exposed

If you’re more patient, you can opt to stay in the trade, giving price more time to reach the target.  After all, if the target on either side gets met, the greater trend will likely follow.  By using a trailing stop loss, you may be able to stay exposed in a “risk-free” trade.  This makes bullish chart patterns like the diamond bottom great setups for longer-term positions.

Breaking It Up

You could also do all of the above by deploying different chunks of capital in different ways.  For example, you might sell a portion at a primary profit target, then set a break-even stop loss and let the rest ride.  This is common for Bitcoin traders, who often trade to accumulate Bitcoin in lieu of fiat currency due to their deep belief in the asset’s long-term future.  Beware though.  This hybrid trading/investing approach can make it hard to keep your P&L in perspective.

Step 3: Where & How To Stop-Loss Diamond Bottom Trades

You also have options when it comes to stop-losses.

The initial stop loss is typically placed in one of three locations.  First, you can place it on the other side of the newly broken trend line.  Second, you can place it on the other side of the last swing high or low.  Third, you can place it on the other side of the pattern.  (The last two may or may not be the same level.)

Your choice should largely come down to your risk tolerance.  Tighter stops lower potential losses.  But they can also lead to premature exits.

Whatever you do, just don’t freewheel it.

Get in the habit.

Set.  Stops.  (Even if they are loose.)

Moreover, how you use them should match your overall strategy.

Trailing Stop Loss

Some traders prefer trailing stop losses.  This more passive technique allows you to lock in unrealized gains without exiting.  Instead of cashing out, shadow the trend with your stop loss.  Lesser pullbacks, moving averages, Fibonacci extension levels, and other minor levels are all options.  If you’re well in the money or trading long-term, you could even go with a fixed percentage.  It is such a common practice that some trading platforms and tools allow you to automate it.  Sure, it can make you susceptible to stop hunts.  But that’s better than losing money.

Break Even Stop Loss

Break-even stop losses are meant to do one thing.  They prevent you from taking an L from a winning position, which is one of the worst feelings in trading.  As soon as it is appropriate, move your stop loss up to a level that ensures you can’t lose money.  You’ll be able to do it earlier if you bought along the bottom of the diamond.  Otherwise, you may have to wait until some sort of post-breakout support or resistance.  This strategy is a great way for newer traders to keep confidence high.  It can also protect you from false breakouts.

Other Chart Pattern Types

The diamond bottom pattern operates in the same way as many others.

Even though diamonds don’t have many closely-related patterns, they still share traits with other accumulation patterns.  They also fall into the categories of consolidation pattern, bullish chart pattern, reversal chart pattern, and bearish reversal chart pattern.

It is a good idea to study more of these patterns and their relationships.

The vast majority of them are worth learning about.

• Adam and Eve Patterns
• Ascending Triangle Patterns
• Bear Flag Patterns
• Cup and Handle Patterns
• Descending Triangle Patterns
• Descending Wedge Patterns
• Double Bottom Patterns
• Double Top Patterns
• Head and Shoulders Patterns
• Rising Wedge Patterns
• V Bottom Patterns
• W Patterns

At the very least, you should do a deep dive on the most popular and common ones.  Then, skim the rest of the list if you must.  You don’t have to commit every single one to memory.

However, learning about different chart patterns has big advantages.  It will help you find more trading opportunities.  Perhaps more important, it will expose you to many proven trading ideas.  More important still, it will teach you a lot about price action, market psychology, and more.

In the end, how patterns help elucidate the story in the charts is even more useful than the signals they provide.

True traders always consider contingencies for whatever the market brings anyway.

Takeaways

To review:

The diamond bottom is a bullish accumulation pattern.

• It is characterized by diverging then converging support and resistance.
• It gives a bullish bias and acts as a reversal signal most often.
• The standard trade is a breakout trade above the second-phase resistance line or below the second-phase support line.
• Diamond bottom patterns are fairly simple and fairly easy to recognize but rare and lesser-known.
• They are easy to incorporate into many types of trading strategies and perform well.
• They are especially popular among breakout traders and pattern traders.

Like all chart patterns, diamond bottoms don’t guarantee anything.  However, they do hint at upcoming possibilities.  They also come with a proven trading framework.  What’s more, you can study more patterns to find even more opportunities.

Pattern analysis may not be a silver bullet, but it is a useful weapon in your trading arsenal.

Have questions or more information to add?  Contribute to the conversation in the comments below!  Or, if you know someone who could benefit from this post, share it with them.  You can also check out our Chart Patterns Guide to improve your chart analysis skills.