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.
Broadening patterns, also called megaphone or expanding patterns, form when price creates progressively higher highs and lower lows, diverging rather than converging. These patterns reflect increasing volatility and disagreement between buyers and sellers, often appearing during periods of uncertainty or at major market turning points. Broadening patterns are among the most challenging formations to trade because they lack the contracting structure of typical chart patterns.
Bull and bear flags are continuation patterns consisting of a sharp price move (the flagpole) followed by a brief, counter-trend consolidation channel (the flag). Bull flags slope downward after an upward pole; bear flags slope upward after a downward pole. These patterns represent a pause in strong momentum before the trend resumes, and they are among the most commonly traded continuation setups.
Ascending triangles form when price creates a horizontal resistance line at the top and a rising support trendline at the bottom, indicating buyers are becoming more aggressive. Descending triangles feature a horizontal support floor with a declining resistance trendline, suggesting sellers are gaining control. Both patterns are typically continuation patterns that resolve in the direction of the prevailing trend with a measured move target equal to the triangle's height.