Written by and copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition,
pictured on the right, pages 179 to 195. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
Let me be clear about this: I don't like diamonds. They are as tough to spot as night crawlers in
the grass on a summer night. Most often, you'll find diamond bottoms in a bull market with an upward breakout, but
those in a bear market rank second for overall performance in part, I think, because I found so few. A redeeming
quality of diamond bottoms is that a quick rise often follows a quick decline.
Score your chart pattern for |
performance by clicking
Important Bull Market Results for Diamond Bottom
Overall performance rank for up/down breakouts (1 is best): 8 out of
23; 1 out of 21
Break even failure rate for up/down breakouts: 4%; 10%
Average rise/decline: 36%; 21%
Throwback/pullback rate: 53%; 71%
Percentage meeting price target for up/down breakouts: 81%; 63%
The above numbers are based on hundreds of perfect trades. See the glossary for definitions.
Diamond Bottom Identification Guidelines
|Price trend||Downward leading to the pattern.|
|Shape||Looks like a diamond, but usually one tilted to the side.|
|Trendlines||Prices form higher peaks and lower valleys (a broadening pattern) in the first part of the pattern, then price action narrows with lower peaks and higher
valleys. Trendlines outline many of the peaks and valleys, forming a diamond shape.|
|Touches||Prices will touch each trendline once or twice. Don't worry if your lines cross some of the price outliers.|
|Volume trend||Downward trend 66% of the time.|
|Breakout||Upward 69% of the time.|
Diamond Bottom Trading Tips
Consult the associated figure on the right.
|Measure rule||See the measure rule figure to the right. Compute the height from the
highest peak (A) to the lowest valley
(B) in the pattern and then multiply it by the above
“percentage meeting price target.”
Add it (upward breakouts, point A) or subtract it
(downward breakouts, point B) from the breakout
price to get the price target (C).|
|Price trend||See the price trend figure to the right. If price makes a quick, nearly
vertical drop (A) leading to the diamond and the
breakout is upward, expect price to recover back to the price at which it started
the plunge (B). Also, price must have something to
reverse. Diamonds with short-term (less than three months) price trends leading
to the diamond perform best.|
|Half staff||See the half staff figure to the right. If the diamond
acts as a continuation pattern, meaning that price exits (C to D in the same direction as
it entered the pattern (A to B), then the diamond can act as a half-staff
pattern (half the move is still ahead). The move after the breakout (CD) will often fall
short, so look for overhead resistance
or underlying support where price might stall.|
|Price velocity||High velocity moves after the pattern often follow high velocity moves leading to the pattern.|
|Yearly low||For best performance, diamonds with breakouts within a third of the yearly low perform best.|
|Volume trend||A rising volume trend results in the best post breakout performance.|
|Throwbacks and pullbacks||Throwbacks and pullbacks hurt post breakout performance.|
The Measure Rule
Diamond Bottom Example
The above figure shows an example of a diamond bottom chart pattern. Many times the diamond chart pattern is skewed
or pushed to one side, making diamonds difficult to spot. In this example, outliers A and
B hide the diamond shape.
Notice that price at D tries to climb back to the launch point C but does not quite make it. That is typical behavior so plan accordingly when you trade. This diamond bottom also
shows a U-shaped volume pattern.
-- Thomas Bulkowski
Other Diamond Bottom Examples
Copyright © 2005-2013 by Thomas N. Bulkowski. All rights reserved. For people who like peace and quiet: a phoneless cord.