How to trade with Megaphone Pattern?
Bullish Megaphone and Bearish Megaphone patterns was first introduced in Richard Schabacker’s 1932 book. Indeed, this broadening formation usually appears when the stock market is volatile and a stock’s direction is uncertain. Alike all price formations, the megaphone chart pattern can be a bullish and bearish pattern. Also, it can be traded as a continuation figure and a reversal figure. However, stock traders tend to use it in different ways. For instance, it can be traded when it fails.
Megaphone Stock Pattern
What is the Megaphone pattern?
Megaphone stock pattern is one of the most useful price formations in forex trading and stocks trading. In fact, it consists of a minimum of two higher highs and two lower lows. However, this pattern commonly appears in highly volatile markets where traders are not confident about the upcoming market movements. Typically, we can identify the megaphone stock pattern when the market is at its top or bottom.
To illustrate, the nomination of a megaphone comes from the fact that this pattern represents a formation of five different swings. Each swing is greater than the prior swing which provides this figure its megaphone appearance.
Megaphone stock pattern represents a normal market state. It reflects a situation in which bulls and bears are battling over a particular stock market direction. To clarify, the megaphone chart pattern appears in most cases when the stock market is very volatile and the overall market orientation is uncertain. Regardless, it is important to know that the longer the time frame is, the better the pattern will perform. Nevertheless, most traders tend to use the megaphone chart pattern when it is created in a daily or weekly time frame.
How to identify the Megaphone pattern?
Megaphone chart pattern is not difficult to identify. In effect, this type of price formation doesn’t require advanced knowledge from chartists to be spotted. It is simply composed of five swings. Each swing has to have a minimum of two higher highs and two lower lows. Hence, we can highlight this pattern on any stock chart by linking the two highs and the two lows. At this point, we will get two diverging trendlines. In which, we will consider them as principal levels. So, after connecting different high and low points, the shape of a megaphone will arise. However, it is important to mention that swings should not close below or above their pivot line. Therefore, we will guarantee that they will create swing highs as pivot highs and swing lows as pivot lows.
A breakout happens when the price closes outside the pattern (outside the two trendlines) after creating the fifth swing.
So, as the image below shows:
-R: swing high (resistance)
-S: swing low (support)
Like all price figures, there are specific market conditions that tend to follow the appearance of the megaphone chart pattern. Thus, we can mention:
When it comes to identifying such a pattern, volume plays a critical role. Indeed, in both types, bullish and bearish megaphones, volume generally peaks with prices. Thereby, remarking an increase in the volume along with the appearance of the megaphone chart pattern can be considered a strong indicator.
As we stated earlier, the formation of a megaphone stock pattern reflects the situation of unbalance in the stock market. to explain, buyers and sellers are fighting to dominate the stock market. Hence, we will note this pattern when bulls are pushing the prices upward. In contrast, it is possible to see this pattern when bears make the prices drop.
It refers to the possible price movement that the megaphone stock pattern can show. In other words, we should study our pattern and try to predict if it is worth taking action or not. Because opening a position without planning from the beginning your take profit or stop loss may seem risky.
Bullish Megaphone pattern example
Bullish megaphone pattern is a type of price formation that occurs in trending stock markets. Known also as “megaphone bottom”, it appears usually when prices are experiencing an upward movement. This chart pattern typically leads to a breakout upwards, above the upper trendline. Thus, it confirms the continuation of the ongoing bullish movement.
Bearish Megaphone pattern example
Bearish megaphone pattern is a common price figure in stock markets. Called also a “megaphone top”, it occurs normally during a downward tendency. This chart pattern results normally in a breakout downwards, below the lower trendline. Thereby, it confirms the continuation of the ongoing bearish movement.
Theoretical ways to trade the Megaphone pattern
Megaphone chart patterns are most practical for day and swing traders. Nonetheless, long-term traders can use it as a signal to shore up their ongoing positions. In fact, by identifying the type of the megaphone chart pattern we can anticipate where the market may head. Regardless, megaphone stock patterns offer two main trading opportunities. In a way, we can trade the breakout as a megaphone continuous pattern. On the other way, we can focus on trading reverse movements by considering the megaphone as a reversal pattern. To explain, when this pattern appears during a bullish market and the price closes above the upper trendline, then, it acts as a continuation pattern. Conversely, we will consider it as a reversal pattern when it arises in an uptrend and the price closes below the lower trend line.
Nevertheless, stock traders tend to take advantage of this pattern in multiple ways. Hence, we can trade the megaphone chart patterns as:
It represents the simplest method, by which traders wait until the price closes above/below the upper/lower trendline after creating the fifth swing. Thus, the breakout can be either upside or downside depending on the type of the megaphone stock pattern (bearish or bullish megaphone pattern). As a rule, stock traders can open trading positions at the moment when the prices close outside the pattern in order to get a strong confirmation of the breakout.
In this case, it won’t be easy to identify an accurate target (exit point). However, traders use a simple way to place their stop loss. They calculate the distance between two trendlines from the point it breaks, then, they fix their exit point at 60 % of this line.
The example below presents an explanation for this method.
As a geometrical chart pattern, the megaphone stock pattern respects the Fibonacci levels as well as the pivot lines. Therefore, this pattern will include some important S&R lines. So, by looking at the image below we can understand that:
-Both lines R1 and R2 can work as probable resistance for a long position.
–S1 and S2 can operate as potential support for short traders.
This approach uses important trading forex blocks levels to determine stop loss, enter points, and targets. In this regard, stock traders rely on Fibonacci retracements and extensions to make the correct trading decisions.
Trading failure formations
Besides standard signals, this can provide traders with useful indications when it fails. In fact, we mean by the failure the case when the price doesn’t succeed to break the trendline after making the fifth swing.
To illustrate, let’s consider a bear market in which we spot a megaphone chart pattern. The pattern fails to break the lower trend line. At this point, traders will go long when the price moves below the third swing low – S2 (a sign of confirmation).
However, this trading technique depends on determining the failure perfectly.
Megaphone stock pattern is a kind of price formation that can be a bullish pattern or bearish pattern depending on whether it is heading up or down. It appears usually in volatile conditions when buyers and sellers are fighting over a stock’s direction. Thereby, it seems most suitable for day and swing traders. However, long-term traders can also use it to support their investments.