Compact X‐ray sources derive their luminosities from the conversion of gravitational potential energy through accretion. A centrally‐produced hard X‐ray continuum photoionizes the surrounding accretion flow, which can produce discrete X‐ray emission. To date, as applied to compact X‐ray sources, a detailed diagnostic approach to the analysis of spectroscopic data has been largely ineffective, owing to the limited quality of available line spectra and the lack of appropriate models of X‐ray line emission in the presence of an ionizing continuum radiation field. We are involved in an atomic modeling program to investigate the discrete spectral response to variations in ambient plasma conditions, with the aim of establishing a new set of plasma diagnostics appropriate to this physical regime. We discuss the physical mechanisms and applications of several of the diagnostics which have been discovered in the Fe L‐shell spectrum, under conditions appropriate to X‐ray photoionized plasmas.