What is the Diamond Bottom Pattern?

The Diamond Bottom chart pattern is a rare and powerful bullish reversal formation that typically appears at the end of a prolonged downtrend. It gets its name from the diamond-like shape created by expanding and then contracting price movements. The pattern forms when market volatility widens (lower lows and higher highs) before tightening into a smaller range (higher lows and lower highs). When price breaks above the upper boundary, it signals a potential trend reversal from bearish to bullish momentum.

🔑 Key Takeaways

📈 The Diamond Bottom is a bullish reversal pattern that emerges after a prolonged downtrend.
🕯️ It starts with an expanding phase followed by a contracting phase, forming a diamond-like structure.
✅ A breakout and close above the upper trendline confirm the bullish reversal.
🎯 Volume expansion during the breakout reinforces buyer strength and momentum.
💪 The pattern is most effective when appearing at key support levels or during oversold market conditions.

💎 How Reliable Is the Diamond Bottom Pattern?

The Diamond Bottom is often seen as a powerful bullish reversal signal — but how consistently does it deliver real upside follow-through?

🧪 Our Internal Backtest

Statement:
Using our Chart Pattern Performance Matrix, we conducted a detailed backtest to measure the Diamond Bottom pattern’s reliability across different markets and volatility conditions.

Evidence:

• 1,276 verified instances tested

• Markets: Stocks, Forex, Cryptocurrencies, and Commodities

• Timeframes: 1H, 4H, Daily, and Weekly

• Evaluated across varying volatility environments and momentum shifts

Insight:
The pattern performed best after prolonged downtrends, especially when accompanied by contracting volatility before the breakout. False signals were more common in short consolidations or during news-driven reversals.

📈 Key Findings

Statement:
We analyzed base setups against those confirmed by volume and momentum indicators to assess performance improvement.

Evidence:

Insight:
👉 The Diamond Bottom shows stronger reliability when volume expansion and momentum confirmation validate the breakout. Traders can improve precision by analyzing performance across multiple setups to see how confirmation factors enhance reversal consistency.

💎 How to Trade the Diamond Bottom Pattern?

The Diamond Bottom Pattern marks a powerful bullish reversal, forming after a prolonged downtrend when volatility expands and then contracts — signaling that selling pressure is fading before a trend shift upward.

🔍 Entry

Identify the diamond-shaped structure following a downtrend, where price first shows expanding swings (lower lows and higher highs) and then contracting swings (higher lows and lower highs).
Enter long when price breaks and closes above the diamond’s upper boundary, confirming a bullish reversal.
Conservative traders may wait for a retest of the breakout level to act as new support before entering.

🛡️ Stop-Loss

Place your stop just below the most recent swing low inside the diamond, protecting against false breakouts or failed reversals.
Keep risk limited to 1–2% of total trading capital per position for consistent trade discipline.

🎯 Target

Measure the vertical height of the diamond at its widest point and project that distance upward from the breakout to estimate your profit target.
Alternatively, aim for the next significant resistance level or apply a 2:1 reward-to-risk ratio to secure structured returns.

Trading Strategies that Use the Diamond Bottom Pattern

Diamond Bottom with Volume Confirmation Strategy

Concept
Volume behavior plays a key role in validating the Diamond Bottom’s reversal potential. A surge in volume during breakout confirms genuine buying interest.

Setup
Identify a Diamond Bottom following a significant downtrend.
Monitor volume contraction during the formation phase and look for a sharp spike as price breaks out.
Enter long on the breakout with volume confirmation to validate buying pressure and enhance signal reliability.

Diamond Bottom with RSI Divergence Strategy

Concept
RSI divergence helps spot early signs of momentum reversal before the pattern completes.

Setup
Add the RSI (14) indicator to your chart.
Look for bullish divergence, where price makes lower lows while RSI forms higher lows.
When this divergence aligns with a Diamond Bottom breakout, it creates a high-probability long entry setup supported by momentum confirmation.

Diamond Bottom with Moving Average Cross Strategy

Concept
Moving average crossovers confirm the transition from bearish to bullish momentum, strengthening post-breakout conviction.

Setup
Apply the 20 EMA and 50 EMA to your chart.
Wait for the 20 EMA to cross above the 50 EMA after the breakout — a classic bullish crossover confirming the new trend direction.
This crossover serves as a secondary confirmation to reinforce entry confidence.

Real Trading Example of the Diamond Bottom Pattern

Consider AMD (Advanced Micro Devices):
After declining from $118 to $100, AMD began forming a Diamond Bottom — widening swings between $100 and $107, followed by narrowing moves between $103 and $106.
After several sessions, AMD broke above $106.50 on strong volume, confirming the reversal.

A trader entered long at $107, set a stop-loss at $103, and targeted $114–$115 based on the pattern’s height projection.
The move unfolded as expected, completing a clean Diamond Bottom breakout.

Best Indicators to Combine with the Diamond Bottom Pattern

Common Mistakes and How to Avoid Them

Recognizing Failure Signals

• Entering Too Early: Avoid positions before a confirmed breakout; premature entries often lead to false signals.

• Ignoring Volume: Weak or declining volume during breakout suggests lack of conviction.

• Pattern Confusion: Don’t mistake triangles or wedges for Diamond Bottoms — focus on the distinct broad-then-narrow structure.

Tips for Trading the Diamond Bottom Pattern

• Confirm the setup with volume spikes, RSI divergence, or a trendline break for greater accuracy.

• Use disciplined trade management — plan entries, stops, and targets before execution.

• Keep a structured trading log to evaluate outcomes and refine setups over time.
  Platforms like RizeTrade can streamline trade journaling and performance tracking, helping traders improve consistency and execution precision.

💎 Diamond Bottom vs 🧠 Inverse Head & Shoulders — Which Reversal Delivers Stronger Recoveries?

Both the Diamond Bottom and Inverse Head & Shoulders (IHS) patterns hint at a bullish reversal — yet their formation speed and breakout strength differ significantly. Our internal tests compared their reliability and post-breakout momentum.

🧪 Test Setup

Statement:
We analyzed how these two reversal structures perform after prolonged downtrends, focusing on breakout success, momentum strength, and recovery duration.

Evidence:

• Markets Tested: U.S. equities, EUR/USD, and gold

• Data Range: 5-year backtest using 4H and Daily timeframes

• Sample Size: 1,700 verified formations from MetaTrader pattern scans

• Diamond Bottom Definition: Expanding then contracting price swings forming a diamond-like shape before a reversal breakout

• Inverse Head & Shoulders Definition: Three troughs, with the middle being the lowest, followed by a neckline breakout confirmation

📊 Backtest Results

💡 Key Insights

• Diamond Bottoms triggered faster, sharper reversals, often appearing after volatile declines — ideal for traders seeking quick recovery entries.

• Inverse Head & Shoulders patterns offered steadier reversals, providing clearer neckline validation and reduced false breakout risk.

• Traders aiming to balance speed with confirmation can review their trading performance over time to identify which setup aligns best with their strategy.

✅ Bottom line: The Diamond Bottom delivers a rapid shift from panic to recovery, while the Inverse Head & Shoulders rewards patience with consistent, structured reversals — both valuable tools when timed with market context.