For years, market aficionados and forex traders alike have been using simple price patterns not only to forecast profitable trading opportunities but also to explain simple market dynamics. As a result, common formations such as pennants, flags, and 澳洲幸运5官方开奖结果体彩网:double bottoms and tops are 🍌often used in the currency ౠmarkets, as well as many other trading markets.

A less talked about but equally useful pattern that occurs in the currency markets is the bearish diamond top formation, commonly known as the 澳洲幸运5官方开奖结果体彩网:diamond top. In this article, we'll explain how forex traders can quickly identify diamond tops in💧 order to capitalize onꦯ various opportunities.

The diamond top occurs mostly at the top of considerable uptrends. It effectively signals impending shortfalls and 澳洲幸运5官方开奖结果体彩网:retracements with relative accuracy and ease. Because of the increased liquidity of the currency market, this formation can be easier to identify in the currency market than in its equity-based counterpart, where gaps in 澳洲幸运5官方开奖结果体彩网:price action frequently occur, displacing some of ﷽the requirements needed to recognize the diamond top. This formation can also be applied to any time frame, especially daily and hourly charts, as the wide swings often seen in the currency markets will offer traders plenty of opportunities to trade.

Identifying and Trading the Formation

The diamond top formation is established by first isolating an off-center 澳洲幸运5官方开奖结果体彩网:head-and-shoulders formation and applying trendlines dependent on the subsequent peaks and troughs.ܫ It gets its name from the fact that the pattern bears a striking resemblance to a four-sided diamond.

Let's look at a step-by-step breakdown of how to trade the formation, using the 澳洲幸运5官方开奖结果体彩网:Australian dollar/U.S. dollar (AUD/USD) 澳洲幸运5官方开奖结果体彩网:currency pair (Figure 1) as an example. First, identify an off-center head-and-shoulders formation in a currency pair. Next, draw 澳洲幸运5官方开奖结果体彩网:resistance trendlines, first from the left shoulder to the head (line A) and then from the head to the right shoulder (line B). This forms the top of the formationไ; as a result, the price action should not break above the upper trendline resistance formed by the right shoul🌱der.

The idea is that the price action consolidates before the impending 澳洲幸运5官方开奖结果体彩网:shortfall, and any penetrations above the trendline would ultimately make the pattern ineffective, as it would mean that a new peak has been created. As a result, the trader would be forced to consider either reapplying the trendline (line B) that runs from the head to the right shoulder, or disregar♔ding the diamond top formation altogether, since the pattern has been broken.

To establish lower trendline support, the technician will simply eye the lowest trough established in the formation. Bottomside support can then be drawn by connecting the bottom tail to the left shoulder (line C) and then connecting another support trendline from the tail to the right shoulder (line D). This connects the bottom half to the top and completes the pattern. Notice how the rightmost angle of the formation also resembles the apex of a 澳洲幸运5官方开奖结果体彩网:symmetrical triangle pattern and is suggestive of a breakout.

Trading the diamond top isn't much harder than trading other formations. Here, the trader is simply looking for a break of the lower support line, suggesting increasing momentum for a probable shortfall. The theory is quite simple. Both upper resistance and lower support levels established by the right shoulder will contain the price action as each subsequent session's range diminishes, suggestive of a near-term breakout. Once a session closes below the support level, this indicates that selling momentum will continue because sellers have fi🥂nally pushed the close below this significant mark. The trader will then want to place their entry shortly below this level to capture the subsequent decline in the price.

This approach works especially well in the currency markets, where price action tends to be more fluid and trends are established more quickly once certain significant 澳洲幸运5官方开奖结果体彩网:support or resistance levels are broken. 澳洲幸运5官方开奖结果体彩网:Money management would be applied to this position through a 澳洲幸运5官方开奖结果体彩网:stop-loss placed slightly above the p𒉰reviously broken support level to minimize any losses that might occur if the break is false and a temporary retracement takes place.

Figure 2 below shows a zoomed-in view of Figure 1. It can be seen that a session candle closed below or "broke" the support trendline (line D.i.), indicating a move lower. The diamond top trader would profit from this by placing an entry order below the close of the support line at 0.7504, while also placing a stop-loss slightly above the same line to minimize any potential losses should the price bounce back above. The standard stop will be placed 50 pips higher at 0.7554. In this example, the 澳洲幸运5官方开奖结果体彩网:stop order would not have been ex💙ecuted because the price failed to bounce back; falling 🍌instead 150 pips lower in one session before falling even further later on.

Fi🍒nally, profit targets are calculated by taking the width of the formation f𝄹rom the head of the formation (the highest price) to the bottom of the tail (the lowest price). Staying with this example using the AUD/USD currency pair, Figure 3 shows how this would be done.

In Figure 3, the AUD/USD 澳洲幸运5官方开奖结果体彩网:exchange rate at the top of the formation is 0.8003. The bottom of the diamond top is exactly 0.7250. This leaves 753 pips bꦏetween the two prices that were used to form the maximum price where profits can be taken. To be safe, the trader will set two targets in which to take profits. The first target will require taking the full amount, 753 pips, and taking half that amount and subtracting it from the entry price.

Then, the first target will be 0.7128. The 澳洲幸运5官方开奖结果体彩网:price target that will maximize profits will be 0.6751, calcul🎃ated by subtracting the full 753 pips from the entry price.

Using a Price Oscillator Helps

One of the cardinal rules of successful trading is to always receive confirmation, and the diamond top pattern is no different. Adding a price 澳洲幸运5官方开奖结果体彩网:oscillator such as a 澳洲幸运5官方🅠开奖结果体彩网:moving average convergence divergence and the 澳洲幸运5官方开奖结果体彩网:relative strength index can increase the accuracy of your trade since tools like these can gauge p👍rice action momentum and be used to confirm the brღeak of support or resistance.

Applying the 澳洲幸运5官方开奖结果体彩网:stochastic oscillator to this example (Figure 4 below), the investor confirms the break below support through🔯 the down🅘ward cross that occurs in the price oscillator (point X).

Putting It All Together

Not only do bearish diamond tops form in the major currency pairs like the Euro/U.S. dollar (EUR/USD), the British pound/U.S. dollar (GBP/USD), and the U.S. dollar/Japanese yen (USD/JPY), but they also form in lesser-known cross-currency pairs such as the Euro/Japanese yen (EUR/JPY). Although the formation occurs less in these cross-currency pairs, the swings tend to last longer, creating more ꦆprofits. Let's look at a step-by-step example of this using the EUR/JPY:

1. Identify the head and shoulders pattern and confirm the offset nature of the formation by noticing that the head is set slightly to the left, while the tail is set to the right.
2. Form the top resistance by connecting the left shoulder to the tip-top of the head (line A) and the head to the right shoulder (line B). Next, draw the trendlines for support by connecting the left shoulder (line C) to the tail and the tail to the right shoulder (line D).
3. Calculate the width of the formation by taking the prices at the top of the head, 141.59, and the bottom of the tail, 132.94. This will provide a total of 865 pips of distance before full profits can be taken. Divide by two and the first point to take profits will be 432 pips below the entry.
4. Establish the 澳洲幸运5官方开奖结果体彩网:entry point. Look to the apex of the right shoulder and notice the point where the candle closes below the support line, breaking through. Here, the close of the session is 137.79. The entry order should then be placed 50 pips below at 137.29, while the stop-loss order will be placed 50 pips above at 137.79.
5. Calculate the first take profit price by subtracting 432 pips from the entry. As a result, the first 澳洲幸运5官方开奖结果体彩网:profit target will be at 132.97.
6. Finally, confirm the trade by using a price oscillator. Here, the stochastic oscillator signals ahead and confirms the opportunity as it breaks below 澳洲幸运5官方开奖结果体彩网:overbought levels (point X).

If the first target is achieved, the trader will move their stop up to the first target, then place a 澳洲幸运5官方开奖结果体彩网:trailing stop to protect any further profits.

The Bottom Line

Although the bearish diamond top has been overlooked due to its infrequency, it remains very effective in displaying potential opportunities in the forex market. Smoother price action due to the enormous liqui🐷dity of the market offers traders a better context in which to apply this method and isolate better opportunities.

When this formation is combined with a price oscillator, the trade becomes an even better catch. The price oscillator enhances the overall likelihood of a p💎rofitable trade by gauging price momentum and confirming weaknesses as well as weeding out false breakout/🅰breakdown trades.