Diamond Top and Bottom

The diamond top and bottom pattern is one of technical analysis’s rarest reversal formations, appearing in roughly 1 in 50 significant trend reversals on daily charts. It combines two distinct structural phases — a broadening formation on the left and a symmetrical triangle on the right — whose four boundary trendlines connect to form a rhombus or diamond shape. Diamond tops form at the peak of extended uptrends and signal bearish reversals; diamond bottoms form after sustained downtrends and signal bullish reversals. The pattern is most reliable on daily and weekly charts where swing points are meaningful and volume data is clean.

How to Identify a Diamond Pattern

1. Broadening left half — Identify two or more swing highs printing successively higher highs and two or more swing lows printing successively lower lows. These four points form an expanding triangle pointing left. Price swings should widen by at least 20-30% from the first oscillation to the last within this phase.

2. Compressing right half — After the widest swing, price begins making lower highs and higher lows, converging into a symmetrical triangle. Draw descending resistance connecting the declining highs and ascending support connecting the rising lows. These lines should angle toward an apex 2-4 weeks ahead.

3. Four closed trendlines — The pattern is only valid when all four trendlines connect to form a closed diamond shape. Upper-left resistance slopes upward, lower-left support slopes downward, upper-right resistance slopes downward, lower-right support slopes upward. If one trendline does not close the shape, you do not have a diamond.

4. Volume profile — During the broadening phase, volume is elevated and erratic, averaging 30-40% above the prior trend’s baseline, with spikes on both directional days. As the symmetrical triangle develops, volume contracts and dries up — this compression is essential. A diamond top without volume contraction during the right half is a lower-quality setup.

5. Breakout candle — A daily close outside one of the right-half trendlines on volume of at least 1.5x the 20-bar average confirms the breakout. False breakouts occur on 20-25% of symmetrical triangle patterns; the volume requirement filters the majority of these failures.

Entry Rules

1. Diamond top — short entry — Enter short when price closes below the lower-right ascending trendline on a daily candle with volume at least 1.5x the 20-bar average. Do not enter on an intraday breach; require the full daily close.

2. Diamond bottom — long entry — Enter long when price closes above the upper-right descending trendline on a daily candle with the same volume threshold.

3. Low-volume breakout protocol — If the breakout candle lacks volume confirmation, do not enter. Wait for price to retest the broken trendline from the outside (former support becomes resistance on a diamond top) and enter on the first rejection candle with a tighter stop.

4. No anticipatory entries — Never enter inside the pattern before the breakout. The symmetrical right half breaks in the direction of the prior trend only 54% of the time when treated as a standalone triangle; the broadening phase adds directional context, but an unconfirmed breakout is a coin flip.

Exit Rules and Targets

1. Primary target — Full measured move: diamond height (highest high minus lowest low) projected from the breakout point in the direction of the break.

2. Partial exit at 50% — Take half the position off at 50% of the measured move. This converts the trade to a risk-free or near-risk-free position and handles the common scenario where price reaches 50-60% of the target before stalling or reversing.

3. Trail the remainder — After the partial exit, trail a stop below the most recent swing low (for longs) or above the most recent swing high (for shorts) on the daily chart.

4. Failed breakout exit — If price closes back inside the diamond boundary on any day after the breakout, exit the full position. The pattern is invalidated regardless of how close price is to the target.

Target Calculation: Find the highest high and the lowest low anywhere inside the four diamond trendlines. Subtract the low from the high to get the pattern height. For a diamond top, subtract that height from the breakout price. For a diamond bottom, add it to the breakout price.

Stop Loss Placement

For a diamond top, place the initial stop above the last swing high made inside the triangle (right) half of the pattern — not above the overall diamond high. The overall high is the widest point of the broadening phase and is typically too far away to be useful. The last triangle swing high is the most recent level where sellers asserted control, and a close above it invalidates the breakdown thesis. This placement typically risks 5-8% of the breakout price while targeting the full measured move, producing reward-to-risk ratios of 3:1 to 4:1 on well-formed setups. For a diamond bottom, apply the mirror logic: stop below the last swing low of the triangle phase.

Practical Example

SPY forms a diamond top over 6 weeks on the daily chart. During weeks 1-3 (the broadening phase), price swings from $448 to $460, then pulls back to $443, then surges to $466 — each oscillation wider than the last, with volume averaging 95M shares per day in a choppy, contested pattern. Weeks 4-6 form the symmetrical triangle: resistance descends from $462 to $455 and support rises from $447 to $452, with volume drying to a 65M share daily average.

On day 37, SPY closes at $449.50 — breaking below the ascending support trendline at $451 on 140M shares, nearly 2.2x the triangle-phase average. Diamond height: $466 high minus $443 low = $23. Price target: $451 breakout level minus $23 = $428.

A trader shorting 100 shares of SPY at $450 places a stop at $456 (above the last triangle swing high), risking $600 on the trade. The target of $428 represents $2,200 in potential profit — a 3.8:1 reward-to-risk ratio. Using a $25,000 account and risking 2% ($500), position size would be approximately 83 shares.

Best Timeframes for Diamond Patterns

Diamond patterns are reliable on daily and weekly charts where each swing requires multiple sessions to develop, giving the four trendlines statistical significance. On daily charts, expect formations lasting 3-8 weeks with measurable moves of 5-15%. Weekly chart diamonds take 3-6 months to complete but generate proportionally larger moves, often 15-30% from the breakout point. Intraday diamonds on 5-minute or 15-minute charts are not recommended — the pattern requires clean swing structure that intraday noise destroys, and volume data at that resolution is too fragmented for confirmation. If reviewing a 65-70% success rate for this pattern, note that it applies specifically to daily charts with volume confirmation; without the volume filter, success rates drop materially.

Common Mistakes

1. Calling it too early — Identifying only the broadening left half and treating it as a complete signal. A broadening formation alone has bearish bias per Edwards and Magee, but it is not a diamond. Require both halves and all four trendlines before placing a trade.

2. Confusing it with head-and-shoulders — The left side of a diamond top resembles H&S because both show a broadening structure with a central peak. The critical difference: H&S has a flat or mildly angled horizontal neckline; a diamond has a diagonal lower-left trendline that slopes down and connects with the ascending lower-right trendline. If you cannot draw four closed lines forming a rhombus, it is an H&S, not a diamond.

3. Entering on intraday trendline breaks — Price frequently pierces trendlines intraday and closes back inside. Requiring a daily close outside the boundary eliminates most false breakouts without sacrificing a significant portion of the move.

4. Wrong stop placement — Placing the stop above the entire diamond high inflates risk by 3-4x and collapses the reward-to-risk ratio below 1:1. The stop belongs above the last swing high within the triangle phase, which is always closer to the breakout point.

5. Ignoring volume contraction — A diamond where volume does not contract during the triangle phase is missing one of the pattern’s core characteristics. Without contraction followed by expansion, the breakout lacks the energy signature that distinguishes a true reversal from a range-bound chop.

How to Journal Diamond Pattern Trades

Journal Field	What to Record	Why It Matters
Pattern Phase Confirmed	Both halves identified / Left half only	Ensures you only trade complete setups
Broadening Phase Volume	Avg shares/day during weeks 1-3	Baseline for measuring subsequent contraction
Triangle Phase Volume	Avg shares/day during compression	Confirms the required contraction
Breakout Volume	Shares on breakout candle vs. 20-bar avg	Primary filter for false breakouts
Setup Quality	Rate 1-5 (trendline clarity + volume)	Identifies which quality tiers perform best
Target Reached	Yes / Partial (% reached) / No	Tracks measured move accuracy over time
Days to Target	Number of trading days	Reveals expected holding period for position sizing

Tracking these fields across 30 or more diamond pattern trades will reveal whether your execution is sound — most traders discover they enter too early (before the daily close) or accept low-volume breakouts that fail at a disproportionate rate. JournalPlus lets you tag trades by pattern type and filter by setup quality rating, so you can isolate your diamond top results from your diamond bottom results and compare them against your broadening formation and symmetrical triangle trades to see where your edge actually lives.

The distinction between diamond tops and bottoms is worth tracking separately in your journal. Diamond bottoms produce sharper and faster reversals when they do occur — institutional accumulation in a downtrend is quieter than distribution in an uptrend, making the left half of a diamond bottom subtler and harder to identify in real time. Traders who journal both variants separately often discover they identify tops far more reliably than bottoms, which is actionable information for allocating trading capital.

For additional context on related reversal patterns, see the broadening formation guide for the left-half structure in isolation, the head-and-shoulders guide for the most common misidentification, and the megaphone pattern which shares the same expanding structure but resolves differently. Traders using volume-based confirmation strategies can also find relevant entry frameworks in the gap trading patterns guide.