The broadening pattern, also known as the megaphone pattern or expanding triangle, is a unique chart formation that represents increasing volatility and market indecision. Unlike most patterns that show price compression, the broadening pattern shows price expanding outward. In this guide, you will learn how to identify and trade this challenging but rewarding pattern.
What is a Broadening Pattern?
A broadening pattern forms when price makes higher highs and lower lows over time, creating an expanding wedge shape that resembles a megaphone. This pattern reflects growing uncertainty as bulls and bears battle with increasing intensity.
Key characteristic: Unlike triangles where trendlines converge, the broadening pattern has trendlines that diverge. Each swing is larger than the previous one, showing expanding volatility.
Types of Broadening Patterns
1. Broadening Top
Forms at market tops and typically signals a bearish reversal:
- Appears after an extended uptrend
- Shows increasing volatility as the trend loses steam
- Often breaks down below the lower trendline
2. Broadening Bottom
Forms at market bottoms and can signal a bullish reversal:
- Appears after an extended downtrend
- Shows buyers and sellers fighting for control
- Often breaks out above the upper trendline
3. Right-Angled Broadening Patterns
- Ascending broadening: Flat top with expanding lower trendline
- Descending broadening: Flat bottom with expanding upper trendline
Broadening Top Example
Stock ABC is in an uptrend. It rallies to $100, pulls back to $90, rallies to $105, drops to $85, rallies to $110, and drops to $80. Each high is higher than the last ($100, $105, $110), and each low is lower than the last ($90, $85, $80). This expanding price action forms a megaphone shape.
How to Identify a Broadening Pattern
Look for these characteristics to confirm a valid broadening pattern:
- At least five touch points (three on one side, two on the other)
- Higher highs forming the upper trendline
- Lower lows forming the lower trendline
- Trendlines diverging (not parallel or converging)
- Increasing volume and volatility as the pattern develops
Psychology Behind the Pattern
The broadening pattern reflects a market in turmoil:
- Emotional trading: Traders become more reactive, causing bigger swings
- Conflicting information: Bulls and bears both have valid reasons for their positions
- Loss of control: Neither side can establish dominance
- Climax coming: Eventually, one side wins decisively
Trading Strategies for Broadening Patterns
Strategy 1: Range Trading
Trade the swings within the pattern:
- Buy at the lower trendline, sell at the upper trendline
- Short at the upper trendline, cover at the lower trendline
- Use tight stops just beyond the trendlines
- This strategy works until the pattern breaks
Range Trading Example
With the upper trendline at $110 and lower at $80, you could buy near $80 with a stop at $77 and target $110. Or short near $110 with a stop at $113 and target $80. Each swing offers a potential $30 move.
Strategy 2: Breakout Trading
Wait for the pattern to resolve with a breakout:
- Breakout above upper trendline signals bullish move
- Breakdown below lower trendline signals bearish move
- Wait for confirmation (close beyond the trendline)
- Volume should increase on the breakout
Entry and Exit Rules
For breakout trades:
- Entry: On the candle close beyond the trendline
- Stop loss: Just inside the pattern at the opposite trendline
- Target: Project the widest part of the pattern from the breakout point
Warning: Broadening patterns are notorious for false breakouts. The fifth touch often fails to hold, leading to a reversal. Wait for confirmation before committing to a breakout trade.
Risk Management
Broadening patterns are volatile, so risk management is critical:
- Position size: Reduce your normal position size due to wider swings
- Stop placement: Stops need to be wider to avoid getting stopped out
- Partial profits: Take some profits as the trade moves in your favor
- No overnight holds: Consider day trading these patterns due to gap risk
Volume Analysis
Volume provides important clues in broadening patterns:
- Increasing volume: As the pattern develops, volume typically increases
- Spike on breakout: Valid breakouts should have high volume
- Volume divergence: If price makes new highs/lows on lower volume, reversal may be near
Common Mistakes to Avoid
- Trading too early: Wait for clear pattern formation with multiple touches
- Ignoring false breakouts: The fifth swing often reverses
- Normal position sizing: Reduce size due to increased volatility
- Tight stops: Volatility requires wider stops than normal
- Forcing the trade: If the pattern is unclear, skip it
When to Avoid Broadening Patterns
Some situations make broadening patterns too risky:
- During major news events or earnings
- In illiquid stocks with wide spreads
- When you cannot afford the wider stop loss
- If the pattern is not clearly defined
Track Your Pattern Trades
Pro Trader Dashboard helps you analyze which chart patterns work best for your trading style. Track broadening pattern trades and see your performance data.
Summary
The broadening pattern is a challenging but tradeable formation that represents increasing market volatility. You can trade the swings within the pattern or wait for the eventual breakout. Remember that these patterns are prone to false breakouts, so patience and proper risk management are essential. When traded correctly, broadening patterns can offer significant profit opportunities due to their wide price swings.
Want to learn about other chart patterns? Check out our guides on ascending triangles and rectangle patterns.