Today many trading strategies are based on graphical models. Therefore, a trader who came to this market for the long haul, need to know and be able to use them. Now we will talk about the figure that is not so often in the price charts but, nevertheless, this figure is considered to be one of the strongest in the graphical analysis.
This figure is called Rhombus or Diamond and is one of the most powerful reversal figures, along with the figure of “Head and Shoulders“. Rhombus is formed on an upward graph at the time when the price is gradually updating the highs, but is no longer able to make a new break-up.
Gradually a peak is formed, after which the price is also beginning to decline slowly, forming a maximum of one below the other. If you hold two resistance lines to these maximums and lower hold the support lines parallel or nearly parallel to them, it is possible to discover that apparently such a figure is suggestive of a rhombus.
On the downtrend Rhombus is formed when the power of “bears” is almost exhausted, but they are able for some time to lower the price lows along the support line directed downwards angle-wise. Once the peak is passed, the minima are becoming higher and higher forming a new support, which is already directed upwards. From the top the figure is limited by resistance lines, which may be parallel to the supports or substantially parallel.
Here, as in the upward movement, this figure suggests that the trend will soon change its direction. That is, the task of a trader is to wait for such a moment and enter into a transaction in time. As you have already probably guessed, this moment comes during penetration of Rhombus figure.
Purchase option entry points:
In order to consider buying an option, we have to wait for the formation of Rhombus figure, which is not always easy.
Modern researchers say that this figure is the rarest and it is quite difficult to see it at the price chart. However, if we see that minimum is passed on a downward graph and the price starts to rise a little, and held on maxima and minima resistance and support lines are close to the parallels, you can plausibly prepare for the option Put.
We traditionally effect the deal when closing the “bullish” candle outside the graphical analysis figure. To confirm the signal you can wait for the closing of the next to Rhombus candle, but in our opinion, this is impractical because such a figure in the graph is quite rare and almost always gives reliable signals.
Sell option entry points:
For sales we need to wait for Rhombus formed on the rising “bullish” trend. After we carried out the resistance lines from the maxima of the movement and these lines form the tip of the rhombus, and the supports – its lower part, we will have to wait for the closing of “bearish” candle outside the pattern. This will be the signal for Put-option.
If we talk about the terms of the options expiration for this strategy, then the best will be the close of trading day. This time is quite enough, as the practice shows, to let the price go far enough to make a profit. The only exception is an option One Touch, which needs more time to achieve the goals. Therefore it is recommended to put an expiry term of 5 trading days for it.
The profitability of the strategy is low because of the frequent occurrence of the signals. The figure is rarely formed on the charts of various financial instruments, which makes it impossible to make this strategy daily or at least weekly. But the accuracy of the signals on this strategy is about 93%, which is very high. Accordingly, this strategy can and should be used as an additional strategy. For the main role it gives too little signals.
The accuracy of the signals generated by the strategy allows fearlessly to enter the market for the purpose of risk tolerance of 3-5%. If you want to enter the market with a few options, such as classical and Out Range or One Touch, for example, do not forget to distribute this amount of risk on all open trades. For example, if you are in the market with three different options, and the acceptable risk level for you is 3%, each option’s risk level should be not more than 1%.
- A very rare figure on the chart
- Rhombus is way too difficult for the novices (some experts find it difficult for more experienced traders either)
- One of the most reliable strategies
- Gives precise signals
- Rhombus helps to determine so important strike levels on the graph
- The overall efficiency and reliability of this strategy is 93% (for rhombs built on 8 points) which is one of the best results among all the strategies as a whole.
That’s all for now. Got any questions? Just ask the expert!