Chart pattern: Broadening top
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What is an broadening top?
A broadening top is a bullish reversal pattern. The pattern is formed by two divergent lines which are horizontally symmetric. It is therefore a reverse symmetrical triangle. The oscillations between the two triangle terminals are therefore becoming increasingly large. Each line must be touched at least twice to be validated.
The broadening top reflects the growing nervousness of investors and also their indecision. If the chart pattern is not spotted quickly, the movements may appear totally random and thus trap many investors.
The formation of this pattern has to be preceded by a bullish movement. This pattern is often due to numerous traders taking profits that leads to the lowest point formations. However, buying pressure remains strong and enables the formation of higher and higher highest points.
The price objective is given by plotting the top point of the triangle at its start where it breaks out. Another technique consists in plotting the maximum height of the triangle at the break out point.
Graphical representation of a broadening top
Broadening tops statistics
Here are some statistics about broadening tops:
- In 53% of cases, there is a bullish exit
- In 75% of cases, the objective of the pattern is achieved by using the technique of the maximum height of the triangle. In the event of a bearish exit, the percentage drops to 64%.
- More than 72% of bullish exits occur when the price is in the upper third of its annual range.
- No bullish breaks are found in the lower third of the value's annual range
Notes on broadening tops
- Figure of indecision
- The movement is greater when exiting upwards
- From the 5th rotation (i.e. 5 contact points on either the resistance or the support), there is an 80% chance that the exit will occur at the next contact with the symmetrical triangle’s support or the resistance lines. From the 6th rotation onwards, this percentage rises to 96%.
Trading strategies with broadening top
The traditional strategy:
Entry: Take a long position at the break in the resistance from the 5th or 6th rotation, if the price is in the upper third of its annual range.
Stop loss: The stop loss is placed under the resistance
Objective: Theoretical objective of the pattern
Advantage: High probability of trade success
Disadvantage:
Traditional strategy (2):
Entry: Take a short position at the break in the resistance from the 5th or 6th rotation, if the price is in the lower third of its annual range.
Stop loss: The stop loss is placed above the support
Objective: Theoretical objective of the pattern
Advantage: High probability of trade success
Disadvantage: Bearish breaks cause less movement than bullish breaks
The aggressive strategy:
Entry: Take a long position in contact with the support and short position in contact with the resistance
Stop loss: The stop is placed above/below the last lowest/highest point that has just been reached
Objective: Opposite terminal of the triangle
Advantage: There can be a large number of contact points (high rotation)
Disadvantage: The pattern is not easy to spot at first.
For your information: The broadening top is a reversal chart pattern. Its opposite pattern is a broadening bottom.
