Guidelines - Identifying a broadening bottom formation
Price Trend
Basically, the first thing you should pay attention to is where the stock is heading at the moment. Like the name of the pattern identify, the pattern must be making a BOTTOM to be valid, so, do not try to trade this pattern in the middle of an upward trend; for that there are better formations to trade and profit.
Shape
The shape itself pretty much resembles a megaphone. Now, this is not set in stone but it is a picture that you should look for when searching for broadening bottom formations. The stock will usually trend high, making new highs, and then recede to make a new low, oscillating back and forth.
Trend Lines
The way the two trend lines should be draw is that one is the opposite of the other. This is very important and makes a world of difference when trading patterns. Like in the name of the pattern, the trend lines should be "broadening", not the opposite, that is why we need the trend lines to be opposites one to another thus making a valid pattern.
Touches
Another important characteristic of a broadening bottom formation is that the stock should touch at least twice each trend line filling all the white space equally. Sometimes you will see what it looks like a broadening bottom, but the stock stays either too long touching the upper trend line or the bottom one thus invalidating the pattern. It should oscillate back and forth "equally".
Volume
Nothing special here but an upward volume DOES help in the broadening bottom formation. Do not make a decision based on volume only, but use it wisely and to further confirm your instincts.
Breakout
Breakouts can either be downward or upward. Sometimes is hard to pinpoint where the breakout is specially because the lines are trending, so the stock can continue to rise in value and never really making the breakout. So just be careful and DO NOT TRY TO GUESS where the breakout is. Sometimes is better to wait for the break and then buy on the pullback.
So, use these guidelines to help you improve your statistics while trading the markets. Always remember that a good position sizing and proper money management must be in place.
Price Trend
Basically, the first thing you should pay attention to is where the stock is heading at the moment. Like the name of the pattern identify, the pattern must be making a BOTTOM to be valid, so, do not try to trade this pattern in the middle of an upward trend; for that there are better formations to trade and profit.
Shape
The shape itself pretty much resembles a megaphone. Now, this is not set in stone but it is a picture that you should look for when searching for broadening bottom formations. The stock will usually trend high, making new highs, and then recede to make a new low, oscillating back and forth.
Trend Lines
The way the two trend lines should be draw is that one is the opposite of the other. This is very important and makes a world of difference when trading patterns. Like in the name of the pattern, the trend lines should be "broadening", not the opposite, that is why we need the trend lines to be opposites one to another thus making a valid pattern.
Touches
Another important characteristic of a broadening bottom formation is that the stock should touch at least twice each trend line filling all the white space equally. Sometimes you will see what it looks like a broadening bottom, but the stock stays either too long touching the upper trend line or the bottom one thus invalidating the pattern. It should oscillate back and forth "equally".
Volume
Nothing special here but an upward volume DOES help in the broadening bottom formation. Do not make a decision based on volume only, but use it wisely and to further confirm your instincts.
Breakout
Breakouts can either be downward or upward. Sometimes is hard to pinpoint where the breakout is specially because the lines are trending, so the stock can continue to rise in value and never really making the breakout. So just be careful and DO NOT TRY TO GUESS where the breakout is. Sometimes is better to wait for the break and then buy on the pullback.
So, use these guidelines to help you improve your statistics while trading the markets. Always remember that a good position sizing and proper money management must be in place.
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