Megaphone pattern

A megaphone pattern forms when the market cannot settle on a price. Buyers push to a new high, sellers answer with a new low, and each swing is larger than the last. On the chart the two boundary lines open like a megaphone.

The pattern appears most often after a long advance, where it is called a broadening top. It also forms after declines as a broadening bottom. Richard Schabacker and later Thomas Bulkowski described these shapes as broadening formations.

• At least two higher highs and two lower lows. The classic broadening top has five turning points: three highs and two lows.
• An upper line that rises and a lower line that falls. Draw them with the trend line tool through the swing highs and the swing lows.
• Swings that cross the pattern. Price travels from one line to the other, not along one side.
• Growing ranges. Candles and swings get larger as the pattern develops, often with uneven volume.
• A trend before the pattern, so there is something to continue or reverse.

The shape has no fixed direction. It shows that volatility is expanding and that both sides are being stopped out in turn. A megaphone after a long rise is treated as a warning of a top, and a close below the lower line as bearish. A megaphone after a long fall can mark a bottom, and a close above the upper line is read as bullish.

Until one of the lines breaks on a close, the only honest reading is a wide, unstable range.

A broadening wedge is a megaphone with a tilt. Both lines slope in the same direction, but they still move apart.

In an ascending broadening wedge both lines rise and the upper one rises faster. Traders watch for a break below the lower line. In a descending broadening wedge both lines fall and the lower one falls faster. Traders watch for a break above the upper line. A regular rising wedge or falling wedge is the reverse case: its lines converge.

• Swing trade inside the pattern – after the lines are defined by two highs and two lows, some traders sell a turn down from the upper line and buy a turn up from the lower line. Enter only after price turns, with the stop beyond the swing that touched the line.
• Target for a swing – the middle of the pattern first, the opposite line second. Many swings stop short of the far line.
• Breakout trade – enter on a candle that closes outside a line, with the stop back inside the pattern beyond the last swing. See breakout trading.
• Target for a breakout – a common estimate is the height of the pattern at its widest part, projected from the break. It is an estimate, not a level price has to reach.
• Size positions smaller than usual. Stops in a megaphone are far from the entry because the swings are large. See risk-reward ratio.

• Megaphone – the lines move apart, the range widens, volatility grows.
• Symmetrical triangle – the lines converge, the range narrows, volatility falls.
• A triangle ends in a breakout by necessity, because the lines meet. A megaphone has no such point and can keep widening.
• A rectangle sits between the two: flat lines and a constant range.

• Buying each new high or selling each new low as a breakout – in a megaphone new extremes are part of the pattern and are often followed by a turn back.
• Drawing the lines too early – two points give one line, not a pattern.
• Using a tight stop – the swings are wide and a stop inside the noise gets hit.
• Selling the upper line without waiting for a turn – price can run along a line or through it.
• Treating the pattern as a precise signal – broadening formations are among the less tidy patterns, and their boundaries are approximate.