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ASIA PACIFICS PREEMINENT TRADING MAGAZINE
MICA (P) 103/07/2009
ISSN 1793-2149
Volume 5 Issue 9www.tradersjournal.com
Australia - A$9.95Hong Kong - HK$68
Malaysia - RM$19.80Singapore - $9.80
The 3-Steps System ToWin At Trading
Trading BroadeningTop/Bottom Patterns
The Hamster OnThe Wheel
Gold Bull Seasonals
The Power Of The
10-Year Cycle
Where Most PeopleGet It Wrong
Being Honest
With Yourself
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TradingBroadeningTop/Bottom
Patterns
SURI DUDDELLA
8
TECHNICAL ANALYSIS
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Broadening top and bottom patterns were frstdescribed in Richard Schabackers book ech-
nical Analysis and Stock Market Profts as rareand intricate patterns. Tese patterns are consideredreversal patterns and usually appear at the major tops/bottoms. Tis pattern is similar to the head andshoulders pattern and may be also called a mega-phone or inverted triangle pattern.
Broadening pattern ormations have fve distinctswings. Each swing is larger than the previous swing,
which gives the ormation its broadening appearance.Te swing points in the pattern are connected by twodiverging trendlines. Pattern ormation has lower lowtroughs and higher high peaks. Each o these swings
Broadening top and bottompatterns are considered
reversal patterns and usuallyappear at the major tops/bottoms. Suri Duddella
discusses how to identifyand trade these reliable
chart patterns.
may also include small minor swings. Te key swingso the pattern are the frst and the fth swings, which
show the reversal o major direction prior to the orma-tion o the pattern. Another unique characteristic obroadening top/bottom patterns are that each swingsincreasing volatility triggers the reversals o upside anddownside swings.
Fibonacci Ratio-based SwingsMost geometric trading patterns exhibit Fibonacci ra-tio relationships in their swings. By that, each swing
has some Fibonacci ratio actor to prior swings. Broad-
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ening patterns exhibit this characteristic. Each swinghas a 1.27 to 1.62 extension ratio to prior swings inprice and time.
Broadening WedgesBroadening patterns orming with slightly angledtrendlines (both should be moving in the same up/down direction) connecting the tops and bottoms arecalled broadening wedges. Tis pattern is also de-
fned as a broadening ascending wedge or broad-ening descending wedge. Broadening wedges havesimilar characteristics to conventional wedges. Broad-ening wedges orm at market troughs and peaks andhave high reliability. On breakout and breakdownlevels o the trendlines, these patterns become veryvolatile once the pattern is complete.
Broadening FailuresBroadening patterns are highly reliable but not inalli-ble. Tey trade better in longer-term timerames thanin shorter timerames. Like most pattern ailures,broadening pattern ailure moves are explosive in theopposite direction. A critical area o retest and ailureis the mid-channel line. In many cases o ailure, therally/decline stops at the mid-line to retest the priortrendline. Usually, the ailure occurs on the last swingbeore a clear breakout/breakdown occurs.
Example Broadening Bottom FailureIn this example, S&P e-mini utures were decliningduring the morning o August 5, 2009 and showeda potential broadening bottom ormation. At 11.00
AM, this pattern started orming its 5th swing tocomplete the pattern. Around noon, the midline was
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tested repeatedly and signaled a broadening bottomailure beore a clear breakout occurred to the upside.
Trading Broadening PatternsBroadening patterns present two trading opportuni-ties.
1. rading the breakout
2. rading the last swing (5th swing, rom 4 to 5) in-side the pattern
Trading the BreakoutWhen trading a breakout, the trade is taken in the di-rection o the breakout/breakdown rom the pattern.
When a price bar closes outside the pattern in the di-rection o the breakout/breakdown, and another pricebar is ollowed by a close above the high o the previ-
ous bar (or breakouts) or a close below the low o theprevious bar (or breakdowns), a trade is triggered.
Trading the Last-SwingA great opportunity is presented in broadening pat-terns in trading the last-swing. Tere are fve swings ina broadening pattern. I the trend ormation in thepattern is to the upside, trading the fth-swing wouldbe to the downside and would be traded rom the toptrendline. Similarly, i the trend direction beore the
pattern is to the downside, the fth swing would be to
the upside and the trade would be rom the bottom o
the trendline.
Price TargetsTe price targets in broadening top/bottom patternsor trading breakouts is the pattern height or the verti-cal distance o the 5th swing (prior to the breakout/breakdown) subtracted rom the breakdown point (incase o a broadening top) and the pattern height isadded to the breakout point (in case o a broadening
bottom).Te target in trading the last swing in the broadeningpatterns would be the trendline on the opposite sideo the pattern. Historically, this would be the widestpart o the pattern and is a very proftable target.
StopsWhen trading broadening patterns, the mid chan-nel line in the pattern is the critical point and trades
should be protected with a stop at this level. Whentrading the last-swing, the stops should be placed out-side the trend line to protect the trade.
Example 1 Broadening Top BreakdownIn Example 1, Broadcom exhibited a broadening topormation rom early 2004 to July 2004. Te lastswing (4-5) was completed in early July at around$32. A short trade was triggered when price reversedrom the top trendline and closed below the previous
bars low. A stop was placed above the top trendline
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(above Swing 5). Tefrst target was placed be-low swing 4 to reach thetrend line. A second tar-get is placed the patternheight below the trendlines breakdown level.Te height o the 4-5swing is used to computethe breakdown target ataround $16.50.
Example 2 Broaden-ing Bottom BreakoutExample 2 shows AdobeCorporations (ADBE)daily charts broadening
bottom pattern. Fromearly January 2008 tolate March 2008, ADBEmade lower lows andhigher highs to orm abroadening bottom pat-tern. On April 24, 2008,
ADBE traded above thehigh o $37.50 and trig-gered a breakout trade.
A stop was placed belowthe trendline around
$35.50. A price target is placed100% o the pattern height abovethe trend line around $43.50.
Example 3: Broadening Top with aMidline FailureExample 3 shows a weekly chart oa Goldman Sachs (GS) broadeningtop pattern. From early 2007 to ear-
ly 2008, GS made higher highs andlower lows and ormed a broaden-ing top pattern. Around $250, GSmade the 5th swing high to completethe pattern. In late March 2008, abreakdown trade was anticipatedbut prices never closed below thelower-trendline. On May 2, 2008price traded at midline 205.70. Tis
was the frst clue that GS may breakbelow the trendline. Te ollowing
week, a short trade was triggered at
$185, when prices closed below the
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low o the mid channel line. A stop was placed above$205.70. Te frst target was placed at the trendlineand a second target was placed the last-swing height
(4-5 swing) below the breakdown level.
Suri Duddella is the author of a new book Trade Chart PatternsLike The Pros. Suri is a private trader and has been trading fulltime futures and equities markets for the past 14+ years. Suri
can be reached at [email protected] and his website is:http://www.surinotes.com
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