Broadening Formations: What They Mean and How to Trade Them

Broadening formations, also known as megaphone patterns, are price chart patterns characterized by widening price swings and increasing volatility. These formations can signal market indecision and are often seen before major breakouts. Understanding how to identify and trade broadening patterns on platforms like XM can help traders prepare for potential high-momentum moves in either direction.

Spotting a broadening pattern can feel confusing due to its chaotic appearance, but it often precedes strong price action. Here’s how to recognize and trade it effectively on XM as part of your effort to learn trading with real-world chart patterns and improve technical analysis skills.

What Are Broadening Formations in Technical Analysis?

Broadening formations are chart patterns where price action expands over time, forming a structure of higher highs and lower lows, creating a megaphone-like shape. This pattern reflects growing volatility and market indecision, often appearing during periods of heightened uncertainty. Structurally, they break the consistency found in other patterns (like triangles), and are commonly seen before major market shifts.

How is a broadening formation defined on a price chart?

A broadening formation is visually and technically defined by the following structural traits:

Widening price range: Successive peaks are higher and troughs are lower, forming diverging trendlines.
No clear direction: The pattern lacks a defined upward or downward slope.
Timeframe: Can appear on daily, weekly, or intraday charts, often over medium-term periods.
Types: Includes broadening tops, broadening bottoms, and inverted megaphones.

These formations often precede sharp breakouts, but the direction (up or down) is not always predictable.

What causes the formation of broadening patterns?

Broadening formations reflect psychological and behavioral dynamics in the market. Key causes include:

Investor disagreement: As noted by the Yale School of Management (2020), diverging opinions between bulls and bears can lead to unstable price swings.
Emotional volatility: Fear and greed intensify near market tops or bottoms, producing erratic buying/selling patterns.
Lack of leadership: No dominant trend or conviction among major market participants leads to chaotic price movement.
External uncertainty: News shocks, interest rate changes, or political events often coincide with these patterns (Wharton Finance Department, 2018).

In short, they are a mirror of rising emotional tension and crowd conflict.

Who first identified broadening formations in trading literature?

Richard Schabacker is credited with early recognition of broadening patterns in his book “Technical Analysis and Stock Market Profits” (1932). He described them as “megaphone patterns” and linked them to unstable market phases.
Edwards & Magee, in “Technical Analysis of Stock Trends” (1948), expanded on Schabacker’s work and formalized the classification of broadening tops and bottoms.
These early analysts saw such formations as rare but significant warnings of trend reversals or large breakouts.

Are There Different Types of Broadening Formations?

Yes, there are several distinct types of broadening formations, including the classical broadening (megaphone) pattern, the broadening wedge, and directional variants like ascending and descending broadening formations. Each type has its own structural features and trading implications. Traders categorize these patterns based on shape, slope, and breakout behavior.

What is a classical broadening formation (megaphone pattern)?

The classical broadening formation often called the megaphone pattern is defined by:

Symmetrical expansion: Both support and resistance lines spread apart.
Higher highs and lower lows: Indicates extreme volatility.
No clear slope: It is generally horizontal.

This pattern signals indecision and high risk trading environments, and typically resolves with a breakout in the direction of the broader trend. Murphy (1999) describes it as a rare but powerful reversal or continuation signal.

How is a broadening wedge pattern different from a megaphone?

The broadening wedge differs from the megaphone in two key ways:

Directionality: It slopes either upward or downward, unlike the flat megaphone.
Asymmetry: One trendline is steeper, creating a wedge shape instead of a symmetrical expansion.

There are two main types:

Rising broadening wedge: Bearish, typically ends in a downward breakout.
Falling broadening wedge: Bullish, with potential for upward breakout.

A comparative study by the CFA Institute (2021) showed wedge patterns have higher predictive accuracy when combined with volume confirmation, especially in daily charts. However, due to the volatility and uncertainty of broadening patterns, traders must be cautious, as outlined in the Risk Warning XM, market conditions can change rapidly and past patterns may not predict future outcomes.

Are ascending and descending broadening formations traded differently?

Yes. Ascending and descending broadening formations differ in slope and market bias:

Ascending broadening formation: Both trendlines slope upward. Signals growing volatility in a bullish context. Traders often watch for bearish reversals at the top of the range.
Descending broadening formation: Both trendlines slope downward. Suggests accumulation under pressure and possible bullish breakout.

According to a backtest from the University of Toronto’s Financial Markets Lab (2022), descending patterns led to successful long trades 63% of the time, while ascending ones were more prone to false breakouts without volume confirmation.

What Do Broadening Formations Signal in the Market?

Broadening formations signal heightened market uncertainty, increased volatility, and potential instability in trend direction. Characterized by widening highs and lows, these patterns often emerge during periods of emotional imbalance between buyers and sellers. Their structure reflects a loss of consensus and a tug-of-war in market sentiment.

Do broadening patterns indicate indecision or volatility?

Yes, they reflect both. The expanding price range shows that the market lacks directional conviction.
Higher highs and lower lows within the formation reveal inconsistent buyer and seller strength.
This behavior is often driven by overreactions to news, earnings, or macro data, which create sharp reversals.
The market appears to be “stretching” in both directions without commitment, which is a classic sign of indecision under high volatility.

How do volume and price behave inside broadening structures?

Volume typically spikes at the extremes (the highs and lows), as traders react to perceived breakout or breakdown points.
Within the pattern, volume tends to be inconsistent, mirroring the unstable price structure.
Price action becomes erratic, with failed breakouts, fast reversals, and deep pullbacks being common.
This creates a trap-heavy environment, where both bulls and bears may be stopped out frequently.
Traders often report difficulty in using tight stops, as volatility frequently exceeds short-term risk parameters.

Can these formations precede reversals or continuations?

Yes, broadening patterns can lead to both reversals and continuations context is key.
In an uptrend, a broadening top may suggest distribution and possible bearish reversal.
In a downtrend, a broadening bottom may signal accumulation before a bullish reversal.
If the breakout aligns with the prior trend and is confirmed by volume, it often results in a continuation move.
Therefore, traders must assess trend context, breakout direction, and confirmation factors before deciding.

How to Trade Broadening Formations Effectively?

Broadening formations, also called megaphone patterns, are volatile price structures marked by higher highs and lower lows, often signaling uncertainty and expansion in market range. To trade them effectively, traders must apply clear breakout logic, dynamic risk control, and strong discipline against false signals.

What is a step-by-step strategy for breakout trading?

This strategy focuses on trading the breakout after the pattern has fully formed:

Identify the pattern
- Look for at least two higher highs and two lower lows with a widening price range.
- Draw two diverging trendlines connecting the extremes.
Wait for a confirmed breakout
- Price must close beyond the outer edge of the pattern (above resistance or below support).
- Avoid entering on the first touch, wait for a breakout candle with volume confirmation.
Use a lower timeframe for entry
- Once breakout is confirmed on H4 or Daily, drop to M15 or H1 to time your entry.
- Enter pullback or retest of the breakout level to reduce risk.
Set trade direction based on breakout side
- Upside breakout → long trade
- Downside breakout → short trade

This structure prevents premature entries and filters noise using multi-timeframe confirmation.

Where should you place stop loss and take profit targets?

Stop-Loss Placement:

Place your stop just inside the pattern boundary, e.g., inside the last swing high (for short) or low (for long).
Add a buffer of 5–15 pips depending on the asset’s volatility.

Take-Profit Targeting:

Use the vertical height of the widest part of the formation and project it from the breakout point.
Set 1st target at 50% of range height, and 2nd at 100% for partial exits.
Alternatively, use key horizontal support and resistance zones or trailing stops once in profit.

This approach blends measured moves with structural levels to optimize risk-reward.

How do professional traders manage false breakouts?

Use volume analysis: Pros check whether the breakout is supported by a volume surge. Low-volume breakouts are more likely to fail.
Wait for candle confirmation: They often wait for candles to close outside the pattern, not just a wick or intrabar move.
Scale in: Instead of full size entry, they may start small and add on confirmation to reduce exposure.
Use trap logic: Some professionals actually trade against false breakouts, fading the move when price re-enters the pattern rapidly.
Trade smaller size with wider stop: Recognizing the high-volatility nature of this pattern, pros balance size with breathing room.

In short, discipline and data validation define how professionals survive noise within broadening formations.

What Are the Common Mistakes When Trading Broadening Patterns?

Broadening patterns are often misunderstood and misused due to their irregular shape, unpredictable breakouts, and emotional trading traps. Common mistakes include confusing them with other patterns, overtrading inside the structure, and succumbing to psychological biases. These errors reduce accuracy and increase exposure to false signals.

Do traders often misidentify broadening vs. triangle formations?

Yes. One frequent mistake is confusing broadening formations with symmetrical or ascending triangles. Key differences include:

Triangles converge; broadening patterns diverge.
Triangles typically contract in volatility, while broadening formations expand.
A misread can lead to incorrect breakout timing or stop-loss placement.

A 2019 study from the NYU Stern School of Business found that 38% of novice traders incorrectly classified broadening tops as ascending triangles during pattern recognition tests, leading to early, false entries.

How does overtrading volatility inside the pattern cause losses?

Inside a broadening pattern, price swings are wide and unpredictable. Traders who attempt to trade every swing believing they can “catch both sides” often fall into the trap of:

Chasing false reversals,
Ignoring stop-loss discipline
Misjudging the breakout point.

The University of Chicago’s Behavioral Finance Lab (2021) observed that overtrading in broadening structures increased average drawdowns by 22% due to whipsaws and inconsistent price rhythm.

What psychological biases arise with this pattern type?

Broadening formations trigger several cognitive and emotional biases, including:

Overconfidence bias: Believing one can time volatile swings precisely.
Recency bias: Expecting the next breakout to follow the last large move.
Confirmation bias: Interpreting random price spikes as trend direction.

These biases were documented in a 2020 report by Harvard Business School, which linked emotional reactivity in volatile chart structures to increased impulsive trading and misinterpretation of price action.

Broadening formations highlight market uncertainty but can offer valuable opportunities for breakout or reversal trades when approached with discipline. By combining this pattern with volume analysis and confirmation indicators, traders can anticipate moves with better timing. On XM charts, recognizing this pattern early and setting well-placed stops and targets can significantly improve your risk-to-reward profile.

Lina Vexley

Lina Vexley is a forex education specialist with a passion for guiding new traders. She offers step-by-step lessons on MetaTrader and risk control, making XM accessible and practical for traders of all experience levels. Email: [email protected]

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