3 Broadening Patterns in the Financial Market
In the financial market, broadening patterns are chart formations that indicate increased volatility. Although many traders are familiar only with the Wedge pattern, there are other important formations that can be used both for short-term trades and long-term investments. In this article, we will explore the three main types of broadening patterns and how to use them strategically.
What Are Broadening Patterns?
Broadening patterns are characterized by two diverging trend lines, meaning they move further apart over time. This creates a chart movement that resembles a “megaphone,” where prices oscillate within the structure before a decisive breakout. This formation is the opposite of a triangle, where the price tends to narrow before a breakout.
A crucial difference from other patterns is that, in broadening patterns, we can trade both within the figure and on the breakout.
Now, let’s explore the three main broadening patterns:
1. Right-Angle Broadening Pattern
This is the best broadening pattern to trade because it defines a fixed price level. One of the formation’s lines is horizontal, while the other is slanted. This allows for better control over market entries and exits.
How to trade it:
If the market was in an uptrend and forms this pattern, the ideal entry is upon the breakdown of the horizontal line.
If the market was in a downtrend and forms a right-angle broadening pattern, the entry is upon the breakout of the horizontal line.
Confirm the entry by observing trading volume: an increase in volume is needed to validate the breakout.
A more conservative strategy is to wait for a retest after the breakout before entering the trade.
This pattern is excellent because it provides a clear price level to work with, unlike broader and less defined patterns.
2. Bearish Broadening Wedge
The Bearish Broadening Wedge occurs after an uptrend. The price continues to rise but with less strength, and the trend lines that define the formation expand in the same direction.
How to trade it:
The entry occurs when the price breaks below the lower part of the wedge, confirming a reversal to a downtrend.
The breakout confirmation must be accompanied by increased volume.
Like the right-angle pattern, waiting for a retest before entering the trade is a viable option.
This pattern indicates that buyers are losing strength, making short-selling a viable strategy.
3. Bullish Broadening Wedge
This pattern occurs after a downtrend. The two trend lines expand downward, indicating that the market is losing strength in the downtrend.
How to trade it:
The entry occurs when the price breaks above the upper part of the wedge, confirming a reversal to an uptrend.
As with other patterns, it is important to observe volume to validate the breakout.
Traders can opt for a safer entry by waiting for a retest of the broken level before opening a position.
Unlike the traditional broadening pattern, which can break in either direction, wedges are only valid when they break in the expected direction (down for the Bearish Wedge and up for the Bullish Wedge).
Conclusion
Broadening patterns offer excellent trading opportunities in the financial market because they indicate moments of strong volatility and emotion among traders. However, it is essential to understand that breakouts will not always be clear, and confirmation through volume is crucial.
Additionally, the entry strategy can be more conservative by waiting for a retest after the breakout, avoiding false signals and improving trade accuracy.
To further deepen your knowledge, studying reference works such as Technical Analysis Explained, considered the “Trader’s Bible,” is essential. This way, you will avoid learning misinformation spread across the internet and be able to use broadening patterns effectively.
If you enjoyed this content, check out more educational materials and free courses on technical analysis to refine your market strategy!
-> Check out the video: