What is a 'Broadening Formation'

A broadening formation occurs during high volatility when a security shows greater movement with little direction. It can be identified by a series of higher pivot highs and lower pivot lows. When connecting these highs and lows, the trendlines form a widening pattern that looks like a megaphone or reverse symmetrical triangle. The chart below shows an example of a classic broadening formation.

Broadening Formation

Also known as a megaphone pattern.

BREAKING DOWN 'Broadening Formation'

Broadening formations occur when a market is experiencing heightened risk over time. For example, many countries experience broadening formations due to heightened political risk ahead of an upcoming election. Different polling results or candidate policies may cause a market to become very bullish at some points and very bearish at other points. Broadening formations may also occur during earnings season when companies may report differing quarterly financial results that can cause bouts of optimism or pessimism.

These formations are relatively rare during normal market conditions over the long-term, since most markets tend to trend in one direction or another over time. For example, the S&P 500 has consistently moved higher over the long-term. The formations are more common when looking at shorter timeframes, such as monthly, weekly, or daily price charts where trends are less pronounced.

Profiting from Broadening Formations 

Broadening formations are generally bearish for most long-term investors and trend traders since they are characterized by rising volatility without a clear move in a single direction. However, they are good news for swing traders and day traders, who attempt to profit from volatility rather than relying on directional movements in a market. These traders rely on technical analysis techniques, such as trendlines or technical indicators, to quickly enter and exit trades that capitalize on short-term movements.

For example, a swing trader may identify a broadening formation and enter long positions when the price hits a lower trendline and/or short positions when the price hits an upper trendline. The widening of these two trendlines means the potential profit for each swing trade is higher than if the trendlines were converging (as in a symmetrical triangle) or parallel (as in a price channel). In addition to looking at trendlines, these traders may look toward momentum indicators to identify the likelihood of a short-term reversal.

Day traders tend to see these patterns more often as well since they are focused on shorter timeframes than other traders, where broadening formations tend to be more commonplace.

RELATED TERMS
  1. Descending Triangle

    A descending triangle is a bearish chart pattern created by drawing ...
  2. Capital Formation

    Capital formation is a term used to describe net capital accumulation ...
  3. Symmetrical Triangle

    A symmetrical triangle is a chart pattern characterized by two ...
  4. Trend Trading

    Trend trading is a trading strategy that attempts to capture ...
  5. Pattern

    A pattern, in finance terms, is a distinctive formation on a ...
  6. Basing

    Basing refers to a period in which a stock or other traded security ...
Related Articles
  1. Investing

    Tales From The Trenches: Volume Confirmed Broadening Pattern

    Find out how to make sense of this tricky - but profitable - formation.
  2. Investing

    The Utility Of Trendlines

    Trendlines give an investor a good idea of the direction an investment might move in. Discover how to make them work for your portfolio.
  3. Trading

    Watching for Buying Signals Near Trendline Support

    These stocks are trading near long-term trendlines. Watch for a bounce.
  4. Trading

    Active Traders Focus Attention on Emerging Markets

    Strong uptrends and well-defined risk/reward setups suggest that it could be time to buy key emerging market ETFs.
  5. Trading

    These Stocks are Trending Higher (CNI, MU, SIX)

    These stocks are in uptrends and trading near trendline support, offering a potential buying opportunity.(CNI, MU, SIX)
  6. Investing

    Simple Strategies For Capitalizing On Trends

    Find out how following a trendline bounce or a new swing high or low can help you get into a trend early.
  7. Trading

    Stocks to Buy Along Trendline Support (ABBV, MXL)

    These stocks are near or approaching trendline support, which is often a favorable time to buy.
  8. Investing

    Commodities Trading Within A Defined Range (CORN, WEAT)

    Charts of several key ETFs are trading within clearly identified ranges. We'll take a look at where the commodities are likely headed next.
  9. Trading

    Trending Stocks Still Giving Buy Signals (XRS, TSM)

    These upward trending stocks are near entry points right now.
RELATED FAQS
  1. What are the differences between patterns and trends?

    Learn the difference between a pattern and a trend. Explore how technical analysts use patterns and trends to identify trading ... Read Answer >>
  2. How are Shooting Star patterns interpret by analysts and traders?

    Learn what the shooting star candlestick formation is and the reasons traders and market analysts commonly interpret it as ... Read Answer >>
  3. How do traders and analyst create profitable Swing Trading strategies in forex?

    Learn how to create a profitable swing trading strategy in the forex market using price channels on bullish, bearish and ... Read Answer >>
Trading Center