Megaphone pattern (well known term) or Broadening formation (term from books) are synonyms and point to well known trading chart pattern.
How to trade Megaphone chart pattern ?
Another chart pattern employ in technical analysis is megaphone pattern. The wide formation is a good hint into the risen risk that accompany change.
The stock market comprises of two giants, that is, buyers and sellers. The contest between the duo forms patterns in the market. To know and identify what patterns stand for is very important.
Megaphone patterns
The way megaphone patterns form earns it a name, ‘broadening formation.’ Stock do migrate without a definite direction due to high volatility. Thus formed megaphone patterns. Higher gets high and lower gets low simultaneously as a result.
Nevertheless, using a megaphone pattern one can get both lower lows and the higher highs. As a result, there is no direction. Important aspect of this pattern are trend lines.
Example : Bullish trend megaphone chart pattern:
Due to this one must be good at joining the dots, else it assumes the shape of a triangle pattern. This will end up change the way one trade.
Example : Berish trend megaphone chart pattern :
The process of forming broadening formation is by using the trend line to link the higher highs and lower lows. The shape of megaphone patterns is just like a reverse triangle.
BREAKING DOWN THE BROADENING FORMATION PATTERN
When market starts having higher risk for a long period of time then megaphone patterns starts forming. One of the key factors contributing to megaphone formation is election. The reason being that electing a particular leader can change the affair of things in a country. Which later have effect on the market. Since the political clime is not stable then the market keeps on fluctuating.
Megaphone pattern also forms as a result of earnings season. Earning report from companies have effect on stock. Earnings may have both good and bad side. And this cause different reactions. One of such reactions results in broadening formation.
Megaphone patterns are usually seeing as bearish pattern. This is because it is a reverse symmetrical triangle. Whereas normal symmetrical triangles are neutral.
Swing as well as day trading both capitalize on volatility. Single direction has always been suitable path that long term investors want to trade.
To successfully trade various patterns, our course on day trading will be helpful. In volatile pattern it is better to trade around the trend lines. All base on one style, while hitting angular support it’s very much best to go long. Also, while hitting angular resistance, go short.
Broadening formation or megaphone formation
A food megaphone pattern formed on the one-minute chart by PTI. Either swing or day trader, the best time to buy is when the trend lines are hit. Angular support while long and the angular resistance while short.
The significant part of technical analysis are trend lines. This result into swing and day traders off profit from the change of a broadening formation.
Up to 2 weeks, Swing trading holds overnight. It’s all has to do with one risk management. Technical pointers are in place to assist one get in and out of trades as soon as possible. The trend lines can be used as entry and exit points also as stop losses. The broadening of megaphone patterns indicates the potential to profit is higher. This can also be indicative of the potential for loss is higher.
Thus, there’s need to trade with effective risk management. Use the technical pointers to self-advantage. The small candlestick 2 to 3 patterns are also useful. The combination of these can provide great entries as well as exits.
Megaphone chart pattern case study
Methodology : In our research we tried Pointzero Megaphone indicator (very good megaphone chart indicator) and test last 10 years for EURUSD, GBPUSD, USDCAD, AUDUSD, NZDUSD on H1, H4 and Daily chart.
We created test using Visual Testing tool in Metatrader :
Results :
| Currency pairs | H1 chart | H4 chart | Daily chart |
|---|---|---|---|
| EURUSD | 51% | 54% | 55% |
| GBPUSD | 45% | 48% | 47% |
| USDCAD | 47% | 49% | 51% |
| AUDUSD | 50% | 53% | 51% |
| NZDUSD | 45% | 49% | 52% |
Discussion :
Results were very bad. We tried to see at least 1:0.8 risk reward ration. For 1 risk and 1 reward test results will be worse than in our research.
Our tests are made by visual and manual observations so we accept any critique.
How to trade megaphone patterns
Megaphone patterns are often most suitable for day and swing traders. It can also be used by long term investors to use as a sign to support their investments. Just like with any style of trading, it’s better to study and learn the different patterns and what they stand for.
Practice trading account begins with opening paper trading account. As a result, you’ll get good at drawing trend lines and linking the dots to arrive at different patterns; which is a crucial part of trading. In personal opinion, success rate, based on our tests, is bad and we avoid to use this pattern in trading decision for smaller time frames. Of course, weekly and monthly chart can be interesting for this pattern.
