Broadening Formation Pattern: How to Trade the Megaphone

The broadening formation, often called a megaphone pattern or expanding triangle, is one of the more challenging but potentially profitable chart patterns to trade. Unlike most patterns that show contracting price ranges, this pattern features expanding volatility with higher highs and lower lows. In this guide, we will break down everything you need to know about trading broadening formations effectively.

What is a Broadening Formation?

A broadening formation is a chart pattern characterized by price action that expands over time, creating a shape that looks like a megaphone or funnel when viewed on its side. The pattern forms when price makes a series of higher highs and lower lows, with each swing larger than the previous one. This creates two diverging trendlines that expand outward.

Psychology Behind the Pattern

Understanding why this pattern forms helps you trade it more effectively:

• Market indecision: Bulls and bears are both active but neither can establish control
• Increasing volatility: Emotional trading increases as uncertainty grows
• News-driven: Often forms during periods of conflicting news or economic data
• Institutional activity: Large players may be accumulating or distributing during these swings

Types of Broadening Formations

1. Symmetrical Broadening Formation

Both the upper and lower trendlines expand at roughly equal angles. This is the classic megaphone shape with no directional bias until it breaks out.

2. Ascending Broadening Wedge

The upper trendline rises more steeply than the lower trendline. Despite the upward bias in the pattern, this often resolves bearishly with a breakdown below the lower trendline.

3. Descending Broadening Wedge

The lower trendline descends more steeply than the upper trendline. This variation often resolves bullishly with a breakout above the upper trendline.

4. Right-Angled Broadening Formation

One trendline is flat while the other expands. If the flat line is on top, the pattern is bearish. If the flat line is on the bottom, the pattern is bullish.

How to Identify the Pattern

Follow these steps to correctly identify a broadening formation:

• Find at least five touch points: You need minimum two touches on each trendline to draw them accurately
• Verify expanding swings: Each successive high should be higher and each low should be lower
• Check the timeframe: The pattern is more reliable on daily and weekly charts
• Look at volume: Volume often increases as the pattern develops due to higher volatility

Trading Strategies

Strategy 1: Trade Within the Pattern

Since price bounces between the two trendlines, you can trade these swings:

• Buy: When price touches the lower trendline and shows reversal signs
• Sell/Short: When price touches the upper trendline and shows reversal signs
• Stop loss: Just beyond the trendline you entered from
• Target: The opposite trendline

Strategy 2: Trade the Breakout

Wait for price to break decisively outside the pattern:

• Breakout entry: Enter when price closes outside the trendline with strong volume
• Confirmation: Wait for a retest of the broken trendline
• Target: Measure the widest part of the pattern and project from breakout point

Entry and Exit Rules

For swing trading within the pattern:

• Wait for price to touch a trendline
• Look for reversal candlesticks (hammers, engulfing patterns, dojis)
• Confirm with RSI divergence or oversold/overbought readings
• Enter on the next candle after confirmation
• Set stop loss 1-2% beyond the trendline
• Take profit at 50-75% of the way to the opposite trendline

Risk Management

Broadening formations are volatile, requiring strict risk management:

• Position sizing: Use smaller position sizes due to wider stop losses
• Stop placement: Always use stops since false breakouts are common
• Scaling: Consider entering in parts rather than all at once
• Maximum risk: Never risk more than 1-2% of your account on a single trade

Volume Patterns

Volume behavior provides important clues:

• During formation: Volume typically increases as swings get larger
• At trendlines: Spikes in volume at reversals confirm the trendlines
• On breakout: High volume breakouts are more reliable
• Low volume warning: A breakout on declining volume often fails

Common Mistakes

Avoid these errors when trading broadening formations:

• Predicting breakout direction: The pattern can break either way. Do not assume
• Trading too early: Wait for clear touches of trendlines before entering
• Ignoring the trend: Consider the broader market context
• Wide stops without adjusting size: Maintain proper risk by reducing position size
• Overtrading: Not every swing within the pattern is tradeable

Combining with Other Analysis

Improve your success rate by combining with:

• Support and resistance: Are the trendlines at major historical levels?
• Moving averages: What is the 50-day and 200-day MA position?
• RSI: Look for divergences at the trendline touches
• Volume profile: Where are the high-volume nodes within the pattern?

When to Avoid the Pattern

Some conditions make broadening formations less reliable:

• Low liquidity stocks: Erratic price action makes patterns unreliable
• Very short timeframes: Intraday megaphones have high failure rates
• Earnings or major events: News can override technical patterns
• Unclear trendlines: If the pattern is not obvious, do not force it

Summary

The broadening formation is a unique pattern that reflects increasing market uncertainty. While it can be challenging to trade, it offers multiple opportunities both within the pattern and on the eventual breakout. Key success factors include proper pattern identification with at least five touch points, strict risk management with appropriately sized positions, and patience to wait for clear setups. Combine the pattern with volume analysis and other indicators for the best results.

Continue learning about chart patterns with our guides on technical analysis basics and support and resistance levels.