Megaphone chart pattern was described for the first time in Richard Schabacker’s 1932 book: “Technical Analysis and Stock Market Profits.”
What is a megaphone chart pattern?
Megaphone chart pattern (well-known term) or Broadening formation (the term from books) is a reverse symmetrical triangle trading pattern formed on increasing price volatility and diagrammed as two diverging trend lines, one rising and one falling. Megaphone pattern consists of two higher highs and two lower lows, and it is formed during high volatility periods.
Another chart pattern employ in technical analysis is the megaphone pattern. Again, the wide formation is a good hint into the risen risk that accompanies change.
The stock market comprises two giants, that is, buyers and sellers. The contest between the duo forms patterns in the market. Therefore, knowing and identify what patterns stand for is very important.
The way megaphone patterns form earns it a name, ‘broadening formation.’ Stock does 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 higher highs. As a result, there is no direction. Therefore, an essential aspect of this pattern is trend lines.
Example: Bullish megaphone chart pattern on Weekly timeframe
What does a long-term megaphone pattern mean? In this case, we can see several weeks of a bullish trend after the megaphone pattern is formed.
Thus, one must be good at joining the dots; else, it assumes a triangle pattern. This will end up changing the way one trades.
Example: Berish megaphone chart pattern :
Forming broadening formation is by using the trend line to link the higher highs and lower lows. Thus, the shape of megaphone patterns is just like a reverse triangle.
Megaphone stock pattern
A megaphone stock pattern is a widening pattern that looks like a megaphone or reverses a symmetrical triangle.
Let us see some examples:
Trading megaphone pattern
To trade a megaphone pattern, we need to detect two higher highs and two lower lows formed during high volatility periods. In that case, we will sell if we see a bullish trend breakout, or we will buy if we see a bearish trend breakout.
When the market starts having a higher risk for a long period of time, then megaphone patterns start forming. One of the key factors contributing to megaphone formation is the election. The reason being that electing a particular leader can change the affair of things in a country. Which later affects the market. Since the political clime is not stable, then the market keeps on fluctuating.
Megaphone pattern also forms as a result of the earnings season. Earning reports from companies affect the stock. Earnings may have both good and bad sides. And this causes different reactions—one such reaction results in broadening formation.
Megaphone patterns are usually seeing as bearish patterns. This is because it is a reverse symmetrical triangle. At the same time, normal symmetrical triangles are neutral.
Is the coil pattern the same as the megaphone stock chart pattern?
No, the Coil pattern is the symmetrical triangle, and the megaphone pattern is the reverse symmetrical triangle.
Swing as well as day trading both capitalize on volatility. Single direction has always been a suitable path that long-term investors want to trade.
To successfully trade various patterns, our course on day trading will be helpful. In a 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.
A significant part of technical analysis is trend lines. This results in swing and day traders 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 that the potential for loss is higher.
Thus, there’s a 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 the Pointzero Megaphone indicator (an excellent megaphone chart indicator) and tested the last 10 years for EURUSD, GBPUSD, USDCAD, AUDUSD, NZDUSD on H1, H4, and Daily chart.
We created a test using the Visual Testing tool in Metatrader :
|Currency pairs||H1 chart||H4 chart||Daily chart|
The results were terrible. We tried to see at least a 1:0.8 risk-reward ratio. For 1 risk and 1 reward, test results will be worse than in our research.
Visual and manual observations make our tests, so we accept any critique.
Trading Megaphone pattern:
How to trade megaphone patterns?
The trading megaphone pattern implies a reverse symmetrical triangle trading pattern identification, but it is a very complex strategy because many false signals exist. The approach uses important price levels for stop loss, enter position and target, and several additional triggers, not only megaphone patterns. For example, divergence and trend lines together with megaphone patterns are excellent triggers to enter into trade.
Megaphone patterns are often most suitable for day and swing traders. However, long-term investors can also use it to use as a sign to support their investments. Like any trading style, it’s better to study and learn the different patterns and what they stand for.
Very often, I got the question: “How do you trade megaphones pattern intraday.” I avoid trading this pattern on lower time frames and intraday, and I try to use it only on H4, Daily, and Weekly chart time frames.
The practice trading account begins with opening a 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. Innal opinion, the success rate, based on our tests, the success rate is bad, and we avoid using this pattern in the trading decisions for smaller time frames. Of course, the weekly and monthly charts can be interesting for this pattern.