Megaphone Patterns

How to Trade a Megaphone Pattern

The megaphone pattern is another chart pattern used for technical analysis. This is one of my favorite patterns because there is usually a lot of volatility happening when you spot it in the wild….and volatility equals opportunity in the trading world. This pattern is famous for its “broadening formation,” the price action also warns of the increased risk ahead. The megaphone chart pattern provides unique entries and exits off different sides of its structure.

A megaphone pattern consists of many candlesticks forming a big, sloping megaphone-shaped pattern. This can be a bullish or bearish pattern, depending on whether it slows upwards or downwards. One thing is certain: the megaphone pattern doesn’t last forever and can explode upwards or downwards out of the structure at any point, but typically after the bottom or top trend lines have been tested 5-8 times.

Megaphone Pattern SPY
We can find megaphones everywhere, including ETFs like $SPY above!

Megaphone Pattern Basics 

Megaphone patterns are also known as broadening formations because of the way they form. During periods of high volatility, stocks can show great movement without seeming to show clear direction. 

Hence the formation of a megaphone. It makes higher highs and lower lows at the same time. Typically, a stock will only make one or the other because it’s choosing a direction. When discussing a bullish trend, everyone is used to talking about higher highs and higher lows.

Or lower lows and lower highs when discussing a bearish trend…

However, with a megaphone pattern, you get both the higher highs and lower lows! There needs to be a clear trend (except within the megaphone). Trend lines are an important part of this pattern, and you must take care of withdrawing them. Carefully connect your peaks and valleys on both sides to find the price action.

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Megaphone Pattern Pivot Levels 

Remember the key pivot levels the stock has produced on the chart, and make sure you’re good at connecting the dots. If not, it could end up looking more like a triangle pattern. That could change the way you trade. Remember, megaphones can form in any time frame, and sometimes there is another pattern within a pattern. (for example, check the daily, weekly, and hourly charts before making an intraday chart on a 5-minute chart.

A broadening formation forms when you use the trend lines to connect the higher highs and lower lows. The resulting picture shows a widening pattern. In essence, megaphone patterns look like a reverse symmetrical triangle.

In bull markets (weekly and monthly bullish trends), downward megaphones on 60-minute and 4HR time frames can lead to epic bullish reversals. Take the chart of $SPX here as an example. You can see on this 60-minute chart how well the downward megaphone structure has emerged. Price continues testing the top of the megaphone more often than the lower side. Why? The bears are losing strength! Why? There are many reasons for that, but the trend is the biggest one. Bears know how STRONG that 50-day moving average is. As price tests, it (purple line) bears look to close their short. Bulls look to buy the dip!

Elections and Earnings

Elections are a big factor in the formation of a megaphone stock pattern. Uncertainty, in general, can greatly impact developing this pattern. 

Why, you may ask? The election of a specific person can change the course of a nation. That tends to affect the market. So, while the market is unsure of where the political climate may go, it’s fluctuating between being bullish and bearish.

Earnings season is another large factor in the forming of a megaphone pattern. Companies reporting their earnings can and will affect a stock.

Good earnings as well as bad earnings cause different reactions. Traders are well aware of how optimism and pessimism affect the stock market. Those reactions form patterns like a broadening formation.

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Trading a Megaphone Pattern

  • Watch for a megaphone pattern to form downwards by connecting two to three sloping peaks and valleys (lower highs and lower lows)
  • Watch for a megaphone pattern to form upwards by connecting two to three rising peaks and valleys (higher highs and higher lows)
  • Connect the peaks and valleys via trend lines
  • Watch for buy areas when the price hits lower trend lines
  • Watch for short areas when the price rejects upper trend lines

Broadening Formation

Did you know that megaphone patterns are seen as a bearish pattern? You may wonder why it’s bearish if it’s a reverse symmetrical triangle. Symmetrical triangles are neutral.

If you’re a long-term or trend trader, then the broadening formation is a bearish pattern for you. There’s so much volatility without a clear direction. This, however, is great news for day and swing traders.

Day trading and swing trading is all about capitalizing on volatility. At the same time, long-term investors or trend traders want to trade in a single direction. Our day trading course is full of helpful strategies to trade many patterns, such as the megaphone pattern successfully.

Since this is a volatile pattern, you want to buy around the trend lines. Depending on your style, it’s best to go long when it’s hitting angular support. Go short when it’s hitting angular resistance. Be prepared to cover because megaphones can break out to the upside, freeing from the price structure (trend lines).

Megaphone Pattern Example

Megaphone Pattern PTI

Technical Analysis 

Trend lines are a large part of technical analysis. Hence, day and swing traders can profit off the volatility of a broadening formation. The goal is short-term movements for profit.

Swing trading typically holds overnight for up to 2 weeks. It’s all about your risk management. Technical indicators help you get in and out of trades quickly. I typically avoid megaphone patterns when swinging trading unless I am selling bull spreads BELOW the bottom trend line of the megaphone while the price action is in a UP SWING moving towards the top of the megaphone resistance. 

You can use the trend lines as entry and exit points and stop losses. The widening of megaphone patterns means the potential to profit is higher. That can also mean the potential for loss is higher. Check the volume and keep an eye on the news. Is there something going on with this stock you should know about?

Hence, there is a need to trade with proper risk management. Use the technical indicators to your advantage. Use the small 2-3 candlestick patterns also. These coupled together can provide good entries as well as exits.

ESF Chart

Final Thoughts: Megaphone Pattern

The megaphone can be found on the downside, too. This pattern will develop during both fear and greed on the charts all the time. Check out the futures chart below. The Coronavirus scare spooked investors in the market and caused the price action to drop quite a bit. Always extend your trend lines out to the future peep!

Megaphone patterns are most successful for day and swing traders. However, long-term investors can use it as a signal to shore up their investments. Just like with any trading style, it’s important to study and learn the differing patterns and what they mean.

Open a paper trading account and practice trading them. As a result, you’ll get good at drawing trend lines and connecting the dots to find the different patterns, which is a very important part of trading.

Remember, the megaphone chart pattern is just one of many patterns within patterns, and you SHOULD learn as many patterns as you can to be a successful trader. 

Frequently Asked Questions

A megaphone pattern can be bullish or bearish. It's bullish as it's rising in an up channel and bearish when it is in a down channel. Watch for price action as it hits the upper and lower channels. The big thing to look out for is the trend outside of the megaphone.

A broadening formation is also knows as a megaphone pattern. Megaphone patterns begin to form when the market begins to have a higher risk over a longer period of time.

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