What is the Megaphone Pattern?
The Megaphone Pattern, also known as the Broadening Wedge, is a price pattern characterized by increasing Swing Highs and decreasing Swing Lows. Its shape resembles a megaphone, and it occurs when the market is volatile without a clear trend direction. By drawing Trendlines connecting Highs and Lows, a Channel Divergence is formed.
Trading Strategy with the Megaphone Pattern
1. Swing Reversal Scenario:
- After the price reaches the fourth Swing, a reversal scenario may occur. The reversal of price direction is anticipated after touching the Trendline Divergence boundary.
- Example: When the price reverses from the last Swing, a sell position can be opened when the price touches the low level of the previous Swing (#2). The target profit can be placed near the Midline or at the next Swing point. Stop Loss is placed a few pips above the last Swing.
2. Breakout Scenario:
- After a movement in a new direction, the next Swing may have the potential to break out beyond the Trendline boundary.
- Example: If the price reverses from the fourth Swing, a buy position can be opened after the price closes outside the Trendline Divergence boundary. Stop Loss is placed a few pips inside the Trendline, according to the High or Low of the previous Swing. Target profit is adjusted according to Risk/Reward Ratio and Money Management.
Example of Trading Strategy with the Megaphone Pattern on GBP/JPY
- 1. Swing Reversal Scenario:
- Sell position is opened when the price touches the low level of the previous Swing (#2).
- Target profit is set at the Midline or at the next Swing point.
- Stop Loss is placed a few pips above the last Swing.
- 2. Breakout Scenario:
- Buy position is opened after the price closes outside the Trendline Divergence boundary.
- Stop Loss is placed a few pips inside the Trendline, according to the High or Low of the previous Swing.
- Target profit is adjusted according to Risk/Reward Ratio and Money Management.
Although the Megaphone pattern is rare, trading strategies utilizing it can provide signals for reversal and breakout. It's important to understand the characteristics of this pattern, determine trading scenarios based on market conditions, and implement good Money Management. With caution and discipline, traders can amplify their profits by utilizing the Megaphone pattern in their trading strategies.