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Expanding volatility - higher highs AND lower lows. The megaphone pattern signals growing uncertainty.
The Broadening Formation (also called a megaphone pattern) is a chart pattern characterized by expanding price swings — higher highs and lower lows diverging outward. Unlike triangles that converge, this pattern widens over time.
The pattern reflects increasing volatility and disagreement between buyers and sellers. Each swing is more extreme than the last as the market oscillates with growing intensity. Broadening formations often appear at market tops when emotions are running high and price action becomes erratic.
The Broadening Formation reveals a market losing its composure. Unlike orderly trends or tidy consolidations, this pattern shows escalating conflict. Each rally makes a higher high, and each selloff makes a lower low. Neither bulls nor bears can establish control.
The expanding swings reflect emotional extremes. Buyers rush in on breakouts to new highs, only to be overwhelmed by sellers who push to new lows. Then buyers stampede back. The amplitude grows because each failed breakout creates trapped traders who fuel the opposite move.
This pattern is often associated with distribution — smart money selling into increasing volatility while the crowd whipsaws between greed and fear. Resolution typically comes as a breakdown, though upside breakouts do occur.
Conservative: Wait for a confirmed break of either trendline with follow-through.
Aggressive: Trade the swings within the megaphone, buying lows and selling highs.
For breakdown: Above the last lower high within the formation. For breakout: Below the last higher low. The widening swings make stops wider, so position size accordingly.
Measured Move: Height of the formation at its widest point, projected from the breakout/breakdown. T1: 50-75% of the measured move for conservative exits. These patterns can produce large moves.
Aim for minimum 1:2. The wide stops from the expanding range require disciplined position sizing.
Broadening Formations are among the most challenging patterns to trade because they represent increasing chaos, not order. Edwards & Magee considered them characteristic of market tops. The key is waiting for a decisive break of one boundary with volume confirmation.
These are tricky to trade - volatility expands both ways. Best used to identify when NOT to trade rather than when to enter.
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