The Broadening Top pattern forms when a security price makes higher highs (1, 3, 5) and lower lows (2, 4) following two widening trend lines. The price is expected to move up or down past the pattern depending on which line is broken first. What distinguishes a Broadening Top from a Broadening Bottom is that the price of the security is rising prior to entering the pattern formation.
This type of formation happens when volatility is high or increasing, and when a security’s price is moving with high volatility but little or no direction. It indicates growing investor nervousness and indecisiveness.
If the price breaks out from the bottom pattern boundary, day traders and swing traders should trade with a DOWN trend. Consider selling the security short or buying a put option at the downward breakout price level. To identify an exit, compute the target price by subtracting the pattern height from breakout point. The pattern height is difference between the pattern’s highest high and its lowest low.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.