Diamond patterns are relatively rare reversal formations that combine a broadening pattern followed by a symmetrical triangle, creating a diamond-shaped outline on the chart. They typically appear at market tops (diamond top) or, less commonly, at bottoms (diamond bottom). The pattern signals an exhaustion of trend momentum as volatility first expands then contracts before a decisive breakout.
First half: expanding range (broadening formation). Second half: contracting range (symmetrical triangle). Overall shape resembles a diamond or rhombus. Volume tends to be irregular during formation and spikes on the breakout. More commonly a reversal pattern, though it can occasionally signal continuation.
Enter on a confirmed breakout below support (diamond top) or above resistance (diamond bottom) with volume confirmation. Wait for a close outside the diamond boundary rather than trading intraday spikes. Look for momentum divergence during the formation to confirm exhaustion. The breakout direction sets the measured-move trade.
Measured-move target equals the height of the diamond (widest vertical range) projected from the breakout point. Place stops inside the diamond on the opposite side. Trail stops using recent swing points once the breakout develops. Invalidation occurs if price reverses back into the diamond pattern.
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Diamond patterns are easy to miss because traders often focus only on the second half (which looks like a triangle). Drawing the left-side broadening portion is key to identifying the full pattern. Due to their rarity, always require strong volume confirmation on the breakout before committing to the trade.
Pennants are short-term continuation patterns that form after a strong directional move. They resemble small symmetrical triangles, with converging trendlines creating a compact consolidation zone. Unlike flags, which have parallel channels, pennants converge to a point. The breakout typically occurs in the same direction as the preceding move, with the measured target based on the flagpole.
Rising and falling wedges are converging trendline patterns where both support and resistance slope in the same direction. A rising wedge (both lines slope upward, converging) is typically bearish, while a falling wedge (both lines slope downward, converging) is typically bullish. Wedges differ from triangles because both trendlines slope in the same direction rather than converging symmetrically.
The cup and handle is a bullish continuation pattern resembling a teacup when viewed from the side. The cup forms as a rounded bottom with the left and right rims at approximately the same level, followed by a small downward-drifting consolidation (the handle). A breakout above the handle's resistance triggers the measured move, calculated from the bottom of the cup to the rim.
Double tops and double bottoms are two-touch reversal patterns that form when price tests the same level twice and fails to break through. A double top signals bearish reversal after an uptrend, while a double bottom signals bullish reversal after a downtrend. The pattern is confirmed when price breaks the support or resistance level formed between the two peaks or troughs.