Broadening Formation chart pattern indicator with alert, SCAN and watchlist for Thinkorswim TOS

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The Broadening Formation (also known as a Megaphone Top or Expanding Triangle) is a unique and powerful chart pattern that stands in stark contrast to the more common contracting patterns like triangles. Its usefulness lies in its ability to capture periods of extreme market volatility, indecision, and emotional trading.

Here’s a detailed breakdown of why it's a valuable tool for traders.

1. It Identifies a Market in Emotional Chaos and Rising Volatility

While most patterns show decreasing volatility (like triangles or pennants), the Broadening Formation does the opposite. It is a visual representation of a loss of control.

• What it shows: The pattern is formed by two diverging trendlines: a rising series of higher highs and a falling series of lower lows. This creates an expanding, megaphone-like shape.

• Why it's useful: It signals that the market is becoming increasingly unstable and emotional. Each new high is met with aggressive selling, and each new low is met with aggressive buying. This pattern often appears at major market tops or during periods of great fundamental uncertainty (e.g., around earnings reports for a volatile stock, or during geopolitical turmoil). It tells you that the market is not consolidating calmly but is instead whipping around wildly.

2. It Provides High-Probability, Actionable Reversal Signals

The primary utility of a Broadening Formation is its tendency to resolve with a trend reversal.

• What it shows: Although price swings are widening, the pattern typically breaks in the direction opposite of the preceding trend. For example, if it forms after a strong uptrend (a "Broadening Top"), the eventual breakout is usually to the downside.

• Why it's useful: It's an excellent warning sign of an impending trend change. A breakdown from a Broadening Top after a long rally can signal a significant top is in place. This allows traders to prepare for short positions or exit long positions.

3. It Offers Clear Entry, Stop-Loss, and Profit Target Levels

Like other patterns, it provides a structured framework for trade management.

• Entry Signal: The most common and reliable entry is on a close outside of the formation's trendlines. A close below the lower (descending) trendline signals a short entry. A close above the upper (ascending) trendline is less common but would signal a long entry.

• Stop-Loss: The logical place for a stop-loss is inside the formation, just on the other side of the broken trendline.

  • For a short trade after a breakdown, place the stop above the most recent swing low within the pattern or above the lower trendline.

  • This risk is well-defined but can be larger than in other patterns due to the pattern's widening nature.

• Profit Target: The most common measuring technique is to take the maximum height of the entire formation and project it downward from the point of breakdown.

  • Why it's useful: This provides a quantified, objective target for taking profits, allowing for clear risk-to-reward calculations before entering the trade.

Visual Example:
*(Imagine a chart showing a stock that had been in an uptrend. It then enters a period where it makes successively higher highs (e.g., $50, $55, $60) and successively lower lows (e.g., $45, $42, $40), creating a widening pattern. The price then breaks below the $40 support level on high volume. The height of the pattern at its widest point is $20 ($60 - $40). This $20 is projected down from the $40 breakout, giving a target of $20.)*

4. It Warns of a Dangerous Environment for Certain Strategies

This is a subtle but crucial use case.

• What it shows: The pattern is defined by false breakouts and whipsaw action within its boundaries.

• Why it's useful: It acts as a giant "caution" sign for trend-following and breakout traders. If you identify a broadening formation, it tells you that ** trading breakouts inside the pattern is likely to be unprofitable.** It encourages a patient approach: wait for the final, decisive breakout at the end of the pattern rather than trying to trade every swing within it.

Practical Trading Example (Broadening Top)

1. Identification: You spot a stock that has rallied to $100. It then begins making wild swings: a high at $105, a low at $90, a higher high at $110, a lower low at $85, and a final high at $115.

2. Entry: The price breaks below the most recent low of $85 and closes at $83 on surging volume. This is your signal to enter a short position. You sell short at $83.

3. Stop-Loss: You place a stop-loss order at $87, just inside the formation above the last swing low.

4. Profit Target: You measure the pattern's height at its widest point: $115 - $85 = $30. You project this $30 downward from the breakdown point (~$85). Your price target is $55 ($85 - $30).

5. Risk-to-Reward: You are risking $4 per share (to $87) to make $28 per share (to $55). This is a 7:1 reward-to-risk ratio, an excellent setup.

Crucial Limitations and Warnings

• Complexity and Rarity: It is a more complex pattern and less common than triangles or flags. It requires practice to identify correctly.

• Whipsaw Risk: The pattern is famous for generating false signals within its structure. The key is to wait for the final breakout confirmed by a strong volume spike.

• Volume is Key: Volume should expand on the swings within the pattern and must surge on the final decisive breakout. A low-volume breakout is suspect.

• It Can Be a Continuation Pattern: While typically a reversal pattern, it can sometimes appear in the middle of a trend as a continuation pattern. This makes the final breakout direction absolutely critical.

Comparison to Other Patterns

Summary: Why the Broadening Formation is Useful

In essence, the Broadening Formation is useful because it:

1. Diagnoses Volatility: It identifies a market transitioning from trend to chaos.

2. Predicts Reversals: It often signals a major trend change is imminent.

3. Provides a Trading Plan: It offers clear entry, stop-loss, and profit target levels.

4. Issues a Warning: It tells traders to avoid counter-trend strategies and wait for the final, high-probability breakout.

It is the chart pattern of choice for recognizing periods of peak uncertainty and capitalizing on the explosive move that typically follows.

Broadening Formation is a chart pattern consisting of 2 trend lines.

• The resistance (upper) line is formed by 2 or more ascending peaks.

• The support (lower) line is formed by 2 or more descending troughs.

• It can be considered as the boundary of incoming Highs and Lows until a breakout occurs.
   

This indicator will be able to detect the Broadening Formation chart pattern.
Please note that if there was no pattern formed on the chart the indicator will not show anything.

It will draw two trend lines of the Broadening Formation on the chart when the pattern is formed.

 
It works on all timeframes. Alerts will be triggered when price cross above the upper trend line or cross below the lower trend line. There will be a wedge drawn above/below the current bar whenever a crossover occurs.

The pattern detection is based on four swing points, two swing highs and two swing lows.

You can control the size of pattern you want to detect by changing the value of Input Strength: the number of bars on the left and right side of the swing high and low.

The upper trend line is formed by point A and B, the lower trend line is formed by point C and D. Please check the chart below.