Learn to recognize and trade a megaphone pattern through interactive charts.
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What is a megaphone pattern?
A Megaphone, also called Broadening Formation, is a rare pattern that occurs when volatility increases to such an extent that prices make higher highs and lower lows. It points to growing uncertainty amongst investors over the direction of the market.
Megaphone pattern duration
This pattern generally unfolds over many months, and years at times.
Megaphone pattern characteristics
A megaphone pattern arises between two diverging trendlines.
- This pattern is characterised by heightened volatility, in the form of widening trading ranges. This includes both greater intra-day and intra-week volatility. On candlestick charts, similar to the ones used in this book, you can expect price bars to become taller over time.
- This pattern usually has 5 touchpoints, which include at least 2 higher highs, and 2 lower lows running through the trendlines.
Volume plays an important part in validating this pattern. In a bearish formation, volumes rise on sell-offs, and drift lower when the price advances. This suggests that buyers lack conviction, and that sellers hold the upper hand. In a bullish formation, an advance in price must be accompanied by rising trading volumes.
Megaphone pattern trading tips
A megaphone pattern creates trading opportunities for short-term investors as it unfolds, but is difficult to trade, as new lows get taken out. Long term investors are advised to wait for a clear breakout in either direction.
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