Now in this unit, we will learn the ‘Megaphone pattern.’
What is the Megaphone Pattern?
Megaphone pattern is a pattern which consists of minimum two higher highs and two lower lows. The pattern is generally formed when the market is highly volatile in nature and traders are not confident about the market direction. Normally this pattern is visible when the market is at its top or bottom. The greater the time frame is the better the pattern will work. However, traders love this pattern when it is formed in a daily or weekly time frame.
How to identify the Megaphone pattern?
Generally, the Megaphone Pattern consists of different swings. But the swing has to have at least two higher highs and two lower lows. A trend line is drawn by connecting point 1 and point 3 while point 2 and 4 are also joined together to draw a line.
These two lines create a shape which looks like a megaphone or inverted symmetric triangle. These swings high and lows have to close above or below its pivot line and therefore they will create swing high as pivot high (R1, R2 and R3) and swing lows as pivot lows (S1, S2 and S3).
Characteristics of Megaphone trading pattern:
Below are a few characteristics of Megaphone trading pattern:
- It is a pattern which consists of minimum two higher highs and two lower lows.
- Megaphone Pattern usually appears at the top or bottom of the market.
- Inverted Symmetric triangle and broadening wedge are the two nicknames of Megaphone Pattern.
- The Megaphone Pattern always appears after a strong trend.
- Failure of a Megaphone Pattern can also be traded.
Volume plays an important role when it comes to the recognition of this pattern. In the Megaphone Top, volume usually peaks along with prices.
An increase in the volume on the day of the pattern confirmation is a strong indicator.
When the pattern is forming it represents that the bulls and bears are fighting to build control of the stock.
The pattern takes place when the bulls take the prices higher.
At the time of formation of the Megaphone Top, then again, bears make the prices fall because of which lower lows are formed. However, the bears ultimately triumph.
The target price refers to the potential price move that this pattern shows.
You can think about if the target price for this pattern is enough to supply an appropriate return after your costs (such as commissions) have been taken into account.
An ideal rule of thumb is that the target price should be greater than 5%, nevertheless, you should consider the existing price if the trade is going in your favor.