Broadening formation shows wider price fluctuations after a trend. This type of chart pattern contrasts well with the triangle chart pattern, where the trading range narrows down before a breakout.
Prices fluctuate in such a way that if you connect the highs and lows, the price action will be within two diverging trendlines, one rising and one falling.
Here is how a broadening formation at the top of an uptrend looks visually.
During the development of this pattern, volume plays an important role.
Broadening formation pattern is also sometimes called reverse triangles, megaphone pattern and right-angled triangle.
Technical analysts don’t trade these patterns unless they get a confirmation of the actual trend. Simple reason is that they don’t get a clear demarcation line for entry, stop loss and exit location.
Here is how a broadening bottom formation looks visually.
These types of patterns develop when heightened disagreement among bulls and bears over the appropriate price of a stock.
Bulls are willing to buy at higher prices and sellers find price levels to take profit. This type of behaviour created higher highs and lower lows.
This kind of pattern can be helpful for professional day traders and scalpers who enter and exit to take quick profit within the same day.
Trade lines drawn by connecting highs and lows act as a support for entry and exit of a trade.
They prefer to go long when price hits the lower trend line and exit near the upper trend line.
Similarly, they can go short at the upper trend line to exit when price approaches the lower trendline.
Beginners should avoid trading this kind of pattern.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
