When trading with technical analysis, learning chart patterns can help interpret price action and structure trades more efficiently, though they aren’t always easy to identify or trade. They also help you identify the potential reversal and continuation in the price chart. One among those is the Broadening Bottom Chart Patterns.
In this article, we will discuss the Broadening Bottom Chart Patterns, its structure, how to identify it, how to trade it with an example, its advantages, and disadvantages.
What is the Broadening Bottom Chart pattern?
The Broadening Bottom Chart pattern is a consolidation pattern formed when the price moves within two diverging trendlines, followed by a strong bullish reversal. This pattern signals increasing volatility and indecision among buyers and sellers.
Once this consolidation of the price is over, the price typically breaks out to begin a strong bullish trend after the pattern is formed, and you can observe the increased volume on the buying side.
Two trendlines are drawn connecting the higher high and the lower lows, forming a widening triangle or inverted symmetrical triangle at the end of the downtrend.
And as price swings become wider, it reflects a market that is losing direction and control, often leading to a sharp bullish movement.
Structure
- Diverging Trendlines: On the price chart, two trendlines are drawn in an ongoing downtrend.
- Upper trendline: It is drawn by connecting a series of higher highs and acts as a strong resistance line.
- Lower trendline: It is drawn by connecting a series of lower lows and acts as a strong support line.
The price should touch each trendline at least two to three times to validate the pattern.
- Breakout Confirmation: The pattern breakout is confirmed only when the bullish candle closes above the resistance line of the pattern.
How to identify the Broadening Bottom Chart Pattern?
Identify the security in a downtrend, and look for a series of price swings that get larger on both the upside and downside, then draw two trendlines connecting them, which diverge toward a point, forming an inverted symmetrical triangle.
As price consolidates, the trading volume tends to increase as the price swings widen.
Wait for a breakout candlestick: The pattern is confirmed when the price closes above the resistance line, and the signal to trade the security in an upward direction.
How to trade the Brodening Bottom chart pattern?
Buy signal:
Entry:
- Enter a long position when the candle closes above the resistance trendline of the broadening bottom chart pattern.
Stop-loss:
- Place the stop-loss at the low of the most recent swing bottom within the inverted triangle.
Target:
- Measure the height of the Broadening Bottom at its widest point, project that distance from the breakout point, and set the target.
Target Price = Breakout Point + (Height of the Broadening Bottom)
- Place your target according to your risk-reward ratio of 1:1, 1:2, or higher.
Example:
The chart below shows an example of “ AWL AGRI Business Ltd” stock at a 1-hour timeframe from 19th to 29th July 2024, and you can see the buy signal generated by the Broadening Bottom Chart pattern.
What are the advantages of the Broadening Bottom Pattern?
- The Broadening Bottom Pattern is one of the highly reliable bullish reversal patterns in technical analysis.
- The trendline of the Broadening Bottom Pattern acts as a strong support after the breakout of the pattern.
- The Broadening Bottom Pattern provides a clear entry, stop-loss, and target for everyone.
- The Broadening Bottom Pattern is versatile across all timeframes and all other security markets, as a single strategy can be applicable for all markets.
What are the disadvantages of the Broadening Bottom Pattern?
- False breakouts can happen in a Broadening Bottom Pattern when the price moves above the trendline with low volume and then it quickly reverses, especially during a volatile market.
- The increasing volatility within the pattern can lead to frequent price swings and false signals.
- The Broadening Bottom Pattern often takes a long time to develop, especially on higher timeframes.
In Closing
In this article, we learned the Broadening Bottom Pattern, its structure, how to identify it, how to trade it, along with an example, its advantages, and disadvantages.
The Broadening Bottom Pattern is a powerful tool used to identify potential bullish reversals in the ongoing downtrend after a pullback, and it indicates multiple opportunities for clear entry and exit rules that are easy to follow.
Your profitability depends on your approach to the trade, your risk management, and your mindset when you are holding the trade, as no indicator or tool is 100% accurate, and when the Broadening Bottom Pattern is combined with additional indicators or tools (RSI, MACD, or others), its efficiency and accuracy increase rapidly.
