Understanding Broadening Formations, Right-Angled and Ascending
The right-angled and ascending broadening formation is a unique chart pattern commonly observed in technical analysis. It appears when prices oscillate between an upward-sloping bottom trendline and a flat top trendline, forming a broadening pattern that expands over time. This pattern is primarily viewed as a continuation pattern, though it can sometimes act as a reversal signal depending on market conditions.
Key Characteristics of Right-Angled and Ascending Broadening Formations
The right-angled and ascending broadening formation has several defining characteristics that traders should look for:
- Flat Upper Trendline: The top of the pattern remains flat, meaning the price repeatedly touches the same resistance level without breaking it.
- Rising Lower Trendline: The lower trendline slopes upward, reflecting higher lows over time. This gives the pattern its "ascending" nature.
- Widening Pattern: As time progresses, the price oscillates within the pattern, with each movement creating broader swings, making the formation look like a megaphone.
- Multiple Touch Points: There should be at least two touches on each trendline for the pattern to be valid, but more touches increase its reliability.
Formation Process
The right-angled and ascending broadening formation typically forms during a period of market indecision. Buyers push prices higher, but sellers hold their ground at the resistance level, causing repeated failed attempts to break out. At the same time, buyers are gradually gaining strength, leading to higher lows.
Eventually, the price breaks out of the flat top trendline, signaling the continuation of an upward trend. However, in some cases, if the market weakens, a breakdown through the lower trendline can signal a bearish reversal.
Trading the Right-Angled and Ascending Broadening Formation
1. Identifying the Breakout
The breakout point is a critical moment for traders. In an ascending broadening formation, the breakout often occurs when the price breaches the upper flat trendline. Traders typically look for a strong price move with increased volume to confirm the breakout. It's important to wait for a close above the resistance level, rather than entering the trade prematurely.
2. Target Price Calculation
The target price for the breakout is calculated using the measure rule. This involves taking the maximum height of the pattern (from the lowest low to the flat resistance) and adding it to the breakout point. This provides an estimated price target after the breakout.
For example, if the lowest low in the formation is $50, and the flat resistance is at $70, the height of the pattern is $20. If the breakout occurs at $70, the target price would be $90.
3. Stop Loss Placement
As with any trading strategy, risk management is crucial. Traders typically place stop-loss orders just below the most recent swing low in the pattern. This ensures that if the breakout fails, losses are minimized.
Performance Statistics
Based on historical data, right-angled and ascending broadening formations tend to perform better in bullish markets. Here are some key statistics:
- Average Rise after Breakout: 23% in bull markets
- Failure Rate: 10% in bull markets, 16% in bear markets
- Average Time to Target: Typically within 2-3 months post-breakout
These statistics highlight the importance of trading in the direction of the prevailing market trend. Ascending broadening formations tend to produce better results in bull markets, where upward momentum supports the breakout.
Common Pitfalls to Avoid
While the right-angled and ascending broadening formation can be a powerful tool for traders, there are a few common mistakes to avoid:
- Entering Too Early: Some traders enter the trade before the breakout is confirmed, which can result in premature losses if the price fails to break through resistance.
- Ignoring Volume: A breakout without a corresponding increase in volume can be a false signal. Always confirm breakouts with rising volume.
- Failure to Place Stop Losses: Without a well-placed stop loss, traders risk significant losses if the pattern fails. Always use risk management strategies to protect your capital.
FAQs About Right-Angled and Ascending Broadening Formations
1. What is the difference between a right-angled ascending and descending broadening formation?
The main difference lies in the direction of the lower trendline. In an ascending broadening formation, the lower trendline slopes upward, while in a descending broadening formation, the lower trendline slopes downward. This gives the patterns different trading implications, with ascending formations favoring bullish breakouts.
2. How reliable is the right-angled ascending broadening formation?
This pattern is considered moderately reliable, with a success rate of around 80% in bullish markets. However, the breakout must be confirmed with rising volume for the best results.
3. Can the right-angled ascending broadening formation signal a bearish reversal?
While this pattern generally signals a bullish continuation, it can sometimes act as a reversal if the price breaks down through the lower trendline. However, such cases are less common.
4. What is the best time frame for identifying this pattern?
Right-angled and ascending broadening formations can be identified on various time frames, but they are most commonly observed on daily and weekly charts. The choice of time frame depends on your trading strategy and goals.
5. How can I confirm the breakout from a right-angled ascending broadening formation?
The breakout is confirmed when the price closes above the upper flat trendline, accompanied by an increase in trading volume. Traders often wait for one or two consecutive closes above the breakout point to ensure the move is valid.
6. What should I do if a throwback occurs after the breakout?
A throwback happens when the price briefly falls back to the breakout level before resuming its upward trend. If this happens, monitor the price closely. As long as it stays above the breakout level and volume remains strong, the breakout is likely still valid.
Conclusion
The right-angled and ascending broadening formation is a powerful chart pattern that can offer traders significant opportunities in bullish markets. By understanding its key characteristics, confirming breakouts with volume, and applying proper risk management strategies, traders can effectively incorporate this pattern into their trading strategies. However, it is essential to avoid common mistakes like premature entries and lack of stop-loss placement to ensure consistent success.