Broadening Top and Bottom Patterns guideline (PDF)

The Broadening tops and bottoms pattern also known is a technical analysis tool used among professional traders, and is very popular among SWING traders. Furthermore, the Broadening tops and bottoms pattern allows traders to detect any potential reversal signs. Thus, these patterns are really useful when conducting technical analysis on the price of a certain asset.

Broadening Top and Bottom Patterns

What is Broadening Top and bottom?

The broadening Top and bottom pattern is a type of consolidation pattern that appears on a chart. Generally, the pattern looks like a triangle and rarely appears in normal market conditions.

However, this pattern is caused by an increase in the price volatility of an asset. It occurs when bears and bulls disagree on the price of a certain asset. This means that some traders believe that the asset is overbought and others believe that it’s oversold. Also, this pattern can only be detected by professional traders, those who have a significant experience in technical analysis. The key to detecting this pattern is to observe the candlestick chart of a certain asset and look for a period where the price reaches new higher highs or lower lows, typically, after a significant change in prices. In other words, after an uptrend or a downtrend. Furthermore, when the period stated earlier is detected, it’s advised to draw 2 diverging lines to be sure of the pattern. One line must be going upward and the other must be heading downward.

What is a broadening formation?

The broadening Top and bottom pattern is a type of consolidation pattern that appears on a chart. Generally, the pattern looks like a triangle and rarely appears in normal market conditions. However, this pattern is caused by an increase in the price volatility of an asset. It occurs when bears and bulls disagree on the price of a certain asset. This means that some traders believe that the asset is overbought and others believe that it’s oversold. Also, this pattern can only be detected by professional traders, those who have a significant experience in technical analysis. The key to detecting this pattern is to observe the candlestick chart of a certain asset and look for a period where the price reaches new higher highs or lower lows, typically, after a significant change in prices. In other words, after an uptrend or a downtrend. Furthermore, when the period stated earlier is detected, it’s advised to draw 2 diverging lines to be sure of the pattern. One line must be going upward and the other must be heading downward. The secret behind the broadening Top and bottom pattern lies in the market sentiment. Bulls believe that the value of the asset will increase as it is Oversold, thus they start buying a significant quantity and are willing to buy at even higher prices. On the other hand, bears are afraid that the asset price could crash at any moment, they believe that the asset is much overbought. that’s why they are willing to sell at any price so they may stop their losses or lock in the highest possible profit from the previous trade.

How do you trade a broadening Top pattern?

This pattern appears typically after a long-term uptrend where prices have increased significantly. This pattern is an indication of a potential upcoming Bearish trend, this means a downtrend. During the Broadening top Pattern formation, prices tend to consolidate between new higher highs and new lower lows.

In other words, investors try to lift the price of the asset by making a rally, reaching up to a new higher high. But this rally is soon offset by a decrease in price to reach a new lower low. This, as we stated earlier is a disagreement between bulls and bears on the future direction of the asset price.

As shown in the following figure, a close demonstration of the shape of the Broadening Top pattern. Every peak is higher than the previous peak and every decrease is even lower than the previous one. There is always a chance, that at any time, prices could crash or could go up again even higher.

Note that the pattern could only be confirmed as a “Broadening Top pattern” when the price breaks the lowest consolidation line. Else, it is unpredictable and could be a continuation of the previous trend. Thus, traders should be really careful while trading using this pattern.

Furthermore, traders should give more, attention to the candle that breaks the consolidation lines. For a Broadening top Pattern, a red candle that breaks the bottom line is considered an accuracy sign. Whereas a green candle could be doubted as it may be a false alarm.

Example

As shown in the following figure, a close demonstration of the shape of the Broadening Top pattern. Every peak is higher than the previous peak and every decrease is even lower than the previous one. There is always a chance, that at any time, prices could crash or could go up again even higher.

Note that the pattern could only be confirmed as a “Broadening Top pattern” when the price breaks the lowest consolidation line. Else, it is unpredictable and could be a continuation of the previous trend. Thus, traders should be really careful while trading using this pattern.

Furthermore, traders should give more, attention to the candle that breaks the consolidation lines. For a Broadening top Pattern, a red candle that breaks the bottom line is considered an accuracy sign. Whereas a green candle could be doubted as it may be a false alarm.

Broadening Top Pattern

How do you trade a broadening Bottom pattern?

The Broadening Bottom Pattern appears after a long Downtrend where prices have significantly fallen from the intrinsic value of the asset. Thus, they are a signal of a potential trend reversal. In other words, an uptrend is on the way. During the Broadening Bottom Pattern formation, prices tend to consolidate between new higher highs and new lower lows. Same as the Broadening Top pattern. However, the key difference between the Broadening Top Pattern and the Broadening Bottom pattern is that one breaks the Bottom consolidation line whereas the other breaks the top consolidation line. Furthermore, the volatility of the asset during the consolidation period is typically high. This is due to the uncertainty of both parties. The Bulls are trying to push up the price because they believe that the asset is trading below its intrinsic value whereas the Bears are selling at any price as they believe that the asset could go down even more. Thus, the new highest highs and lowest lows are forming and each peak is higher than the previous and each fall is deeper than the previous. This consolidation continues for quite some time until the consolidation line is broken. For our case, the top line is broken to confirm that the broadening bottom pattern has occurred and that an uptrend has started. When the line is broken, a remarkable increase in the volume of transactions takes place. And the quantity bought increases significantly, the order book is almost empty from the sellers’ side whereas the buying order keeps coming. And thus, as there are no sellers and a ton of buyers, the price would start going up as everyone is rushing to own the asset. As shown in the below chart, the price of the asset keeps on consolidating between new higher highs and lower lows until the moment where the price breaches one of the consolidation lines. Preferably, the top line in this case so we may confirm the occurrence of a Broadening Bottom pattern.

Example 

As shown in the below chart, the price of the asset keeps on consolidating between new higher highs and lower lows until the moment where the price breaches one of the consolidation lines. Preferably, the top line in this case so we may confirm the occurrence of a Broadening Bottom pattern.

 

Broadening Bottom Pattern

Broadening Top Pattern strategy

Trading using the broadening top pattern is kind of easy. As we stated earlier, this pattern appears after a sharp uptrend so the strategy would be easy.

  • For Swing traders: it’s advised to trade at the start of the broadening period. Once prices start to consolidate, the trader should buy and sell the asset on the same trading day. The benefit would be the spread between the buy price and the selling price of each day. However, it is extremely risky, because the market could never be predicted, but it’s fruitful. This brings us to the famous saying “The higher the Risk the higher the return”.
  • For Short-Position Traders: Once confirmation of a Broadening top pattern appears. Meaning that the bottom line was broken, this typically happens after a towering uptrend. Traders are advised to enter a short position where they can benefit from the potential huge spread between the current price of the asset and the future price of the asset.

Broadening Bottom Pattern strategy

There is only one way to trade the Broadening Bottom Pattern. It is only safe for long position traders.

The strategy is quite simple, keep track of the market trend and look for a period of consolidation. Once the period is detected, keep tracking it, until the price breaks the top line. Look for a green candle preferably, just to be as much safe as possible. If all the criteria are met, the trader can go ahead and enter a long position where he can benefit from a huge spread between the buying and selling prices.

Conclusion

  • The Broadening Tops and Bottoms patterns are consolidation patterns used to detect potential trend reversal.
  • The Broadening top pattern indicates a potential Bearish trend whereas the Broadening bottom pattern indicates a potential Bullish trend.
  • Swing traders benefit the most from the appearance of these patterns.
  • The Broadening tops and bottoms patterns can be detected by drawing 2 lines, one ascending and the other descending.
  • During the appearance of the pattern, the prices consolidated between new higher highs and new lower lows.
Broadening Tops and Bottoms resume