The Broadening Formation Strategy focuses on trading a volatile and often misunderstood chart pattern known as the broadening formation or megaphone pattern. This structure represents an expanding range of price action, marked by higher highs and lower lows, typically reflecting market indecision, increased volatility, or conflicting institutional flows.

This guide outlines how to identify, confirm, and trade broadening formations using price structure, timing, and risk management for high-probability outcomes.

What Is a Broadening Formation?

A broadening formation is a technical pattern where price action forms a widening triangle, making successive higher highs and lower lows. It looks like a megaphone, indicating that market participants are increasingly uncertain or divided in direction.

Key Characteristics:

• Two diverging trendlines (one ascending, one descending)
• At least two highs and two lows connecting both sides
• Appears after strong trends, during news-driven markets, or at major reversal points
• Signals volatility expansion and often precedes breakouts or breakdowns

There are two common types:

• Ascending broadening formation (bullish bias)
• Descending broadening formation (bearish bias)
• Symmetrical broadening (neutral bias until breakout)

Why It Works

Broadening formations represent an increase in volatility and range. Traders often get trapped trying to catch reversals too early. However, when traded strategically—waiting for rejection or breakout signals—they offer explosive opportunities.

This strategy works because:

• Price is testing extremes repeatedly
• Patterns trap weak hands, fuelling momentum after breakouts
• Proper timing allows entries near structure with clear risk control

How to Trade the Broadening Formation Strategy

There are two main ways to trade broadening formations: reversal trades from the edges, or breakout trades after structure fails.

1. Identify the Pattern

Draw two trendlines:

• One connecting the higher highs
• One connecting the lower lows

Confirm at least two valid touches on each side to validate the pattern.
Use 1H, 4H, or Daily timeframes for cleaner formations.

2. Trade the Extremes (Range Reversal Strategy)

When price approaches the upper or lower boundary:

Sell Setup at Upper Edge:

• Wait for price to make a higher high into the upper trendline
• Confirm with bearish reversal signal (e.g. pin bar, engulfing candle)
• Enter short with stop above the wick
• Target the midline or lower boundary

Buy Setup at Lower Edge:

• Price makes a lower low into the bottom trendline
• Confirm with bullish reversal pattern
• Enter long with stop below the wick
• Target the midline or upper boundary

Best for range traders who favour quick reversals and tight risk.

3. Trade the Breakout (Momentum Continuation Strategy)

Once the range structure breaks:

Bullish Breakout:

• Wait for price to break and close above the upper trendline
• Confirm with volume surge, bullish engulfing candle, or RSI momentum
• Enter on breakout or retest
• Target Fibonacci extensions (127.2%, 161.8%) or previous major highs

Bearish Breakdown:

• Price closes below the lower trendline with strong bearish momentum
• Enter on close or pullback
• Target previous lows or measured move of the pattern’s height

Best for momentum traders who wait for structure confirmation.

4. Use Volume and Indicators for Confluence

• Volume: Should contract during the build-up and expand on breakout
• RSI: Look for divergence at the edges of the pattern
• MACD: Crossovers or momentum shifts help confirm breakout direction
• 20/50 EMA: Can be used as trend filters post-breakout

5. Risk Management and Trade Setup

Stop-Loss Placement:

• For reversal trades: beyond the wick of the rejection candle
• For breakouts: below the breakout candle or pullback low

Take-Profit Targets:

• Opposite trendline (for reversals)
• Measured move or Fibonacci levels (for breakouts)
• Always aim for 2:1 or higher risk-to-reward

Best Markets and Timeframes

Markets:

• Forex (GBP/JPY, EUR/USD, AUD/USD)
• Indices (DAX, S&P 500, NASDAQ)
• Commodities and cryptos (gold, oil, BTC/USD)

Timeframes:

• 15M to 1H for intraday setups
• 4H and Daily for swing trading and clean structure

Strategy Summary Table

Component	Details
Pattern Type	Broadening (megaphone) structure
Entry Options	Reversal from edge or breakout of structure
Confirmation Tools	RSI divergence, volume spikes, candlestick setups
Stop-Loss	Beyond wick (reversal) or below breakout candle
Take-Profit Targets	Midline, opposite edge, Fibonacci extensions
Market Bias	Volatility expansion, momentum trap zones

Conclusion: Trading the Broadening Formation with Precision

The Broadening Formation Strategy gives traders an edge in volatile markets where traditional trend setups fail. Whether fading the edges of the range or waiting for breakout confirmation, this strategy rewards patience, structure recognition, and disciplined execution. With proper confluence and clear invalidation levels, it becomes a powerful tool for any trading plan.

To master the broadening formation and integrate it into a complete technical system, enrol in our expert-led Trading Courses at Traders MBA and take your price action skills to the next level.