A megaphone pattern, also known as a broadening top or a broadening formation, is a technical analysis chart pattern that appears on a price chart when an asset’s price is moving in a wider and wider range over time, creating a shape that resembles a megaphone.
What is Megaphone’s trading strategy?
The Megaphone pattern is formed when there are higher highs and lower lows on one side of the chart and lower highs and lower lows on the other. This creates a series of converging and diverging trendlines that form the “megaphone” shape. The pattern is typically considered to be a reversal pattern, meaning that it is often seen as a signal that the asset’s price may be about to reverse direction after an extended trend.
This pattern is usually seen as a sign of increasing volatility and indecision in the market, as buyers and sellers cannot agree on a clear direction for the asset’s price. Let’s see how the pattern looks like:
How to trade the Megaphone strategy?
You should learn how to spot the pattern on the chart at first. The megaphone pattern comes with five different swings. The fifth swing has to close above the pivot point for a bullish pattern validation.
To identify the megaphone pattern on a price chart, look for a series of higher highs and higher lows on one side of the chart and lower highs and lower lows on the other side, forming a “megaphone” shape.
The megaphone pattern is typically considered a reversal pattern, so traders should look for an extended trend showing signs of reversing.
To identify a potential entry point, traders may look for a breakout above or below the megaphone pattern’s trendlines as a potential entry point for a trade.
Buy Signal
Let’s find out the potential buy setup of the Megaphone pattern:
- Wait for the pattern formation to be confirmed on the chart.
- Mark the lows and highs with trendlines.
- Wait for the bullish candle around the trendline.
- You could enter the long position after the candle closes.
- You could place the stop-loss around the fifth swing high.
- You could keep take profit twice the stop-loss.
Sell Signal
Let’s find out the potential sell setup of the Megaphone pattern:
- Wait for the pattern formation to be confirmed on the chart.
- Mark the lows and highs with trendlines.
- Wait for the bullish candle around the trendline.
- You could enter the long position after the candle closes.
- You could place the stop-loss around the fifth swing low.
- You could keep take profit twice the stop-loss.
Conclusion
Traders may use the megaphone pattern as part of their technical analysis to identify potential reversal points and to make trading decisions based on the pattern’s implications for the asset’s future price movements. However, it’s important to note that chart patterns, including the megaphone pattern, should not be relied upon in isolation and should be used in conjunction with other technical and fundamental analysis tools to form a comprehensive market view.
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