DIAMONDS

Binary option traders looking for signs of a trend reversal should keep their eyes open for diamond patterns. The diamond pattern is not as common or as powerful as some other reversal patterns, such as the head and shoulders or triple tops and bottoms, but they exist and should be included in any trader’s arsenal of technical analysis techniques. There are two types of diamond: the diamond top and the diamond bottom.

Diamond tops occur at the apex of uptrends. They can form when price in an uptrend stalls and trades horizontally for a while. The diamond takes shape if vertically short price waves at the beginning of the horizontal trading expand, becoming taller, before contracting once again to their shorter form. The overall effect of this expansion cycle is the shape of a diamond lying on its side. As the last, narrowing part of the diamond top is formed, traders should expect price to break out to the downside since a diamond is a reversal pattern and not a continuation pattern.

Diamond bottoms are the mirror images of diamond tops. A diamond bottom occurs at the lowest point in a downtrend and hails the beginning of an uptrend. Diamond bottoms show the same wave expansion/contraction pattern that diamond tops do, except that toward the end of the contraction phase, traders should expect price to break out to the upside of a diamond bottom. Again, this is the expected direction because diamond bottoms, like diamond tops, are reversal patterns.

Binary option traders can use diamond patterns to reverse the direction of their trading. If they have been making money all day buying Put options, a diamond bottom would signal that it’s time to start buying Calls. Likewise, a diamond top would be a signal to start buying Puts once again.