Broadening Formation: When Volatility Expands

Key Takeaways

• A broadening formation has an up-sloping upper line and a down-sloping lower line, so the trading range expands over time.
• It reflects rising disagreement: each rally overshoots the last high and each drop undercuts the last low.
• The most common mistake is treating the widening swings as clean, tradable trends rather than chop.
• Bulkowski finds broadening tops break out up about 60% of the time, but failure and pullback rates are high.

What It Is

A broadening formation needs at least five turning points, usually three peaks touching an up-sloping upper line and two valleys touching a down-sloping lower line, or the mirror with three valleys and two peaks. The two lines move apart as time passes, which is what makes the pattern "broaden."

The classic version is the broadening top, which appears after a price rise. The broadening bottom is its counterpart, appearing after a decline. Both describe the same expanding-range structure read at different points in a trend.

The Intuition

Most chart patterns calm down as they mature. Triangles, wedges, and flags all narrow as buyers and sellers reach agreement. A broadening formation does the opposite: each swing is bigger than the last, which signals growing disagreement about fair value.

That widening range usually shows up when emotion runs high, such as around news, earnings, or a market turning point. Volatility feeds on itself, so the pattern is hard to trade cleanly. Stops placed inside the range get hit by the very swings that define it.

How It Works

You draw a broadening formation with two diverging trendlines. The upper line rises along the higher peaks. The lower line falls along the lower valleys. Price oscillates between them, and the gap between the lines grows.

A breakout is confirmed by a close beyond one of the lines, ideally on rising volume. The height of the pattern at the breakout point gives a measured move:

target = breakout price +/- (pattern height at breakout)
pattern height = upper line value - lower line value at the breakout

Bulkowski's data on broadening tops shows upward breakouts roughly 60% of the time, an average gain near 42% on those upside breaks, and an average decline near 13% on downside breaks. Break-even failure rates are high, around 18% up and 27% down, and pullbacks or throwbacks occur roughly 67% of the time. The takeaway is that the structure is real but unreliable, so confirmation matters more than usual.

Worked Example

Suppose a stock chops between expanding bounds for two months. Its peaks climb from 50 to 53 to 56, all touching a rising upper line. Its valleys fall from 48 to 46 to 44, all touching a falling lower line. The range has widened from 2 points to 12 points.

A trader watching this avoids buying the dips and selling the rips inside the funnel because each swing is larger and stops get run. Instead they wait. When price finally closes above 57 on heavy volume, the upside breakout triggers. The pattern is about 12 points tall at that point, so the measured target is near 69. A stop goes back inside the pattern below the breakout line.

Common Mistakes

1. Trading the swings as trends. The widening range tempts traders to buy lows and sell highs repeatedly. Each new swing is larger, so stops get hit and the chop grinds accounts down.

2. Placing stops inside the range. A stop set just past the last swing sits inside the next, bigger swing. Position the stop with the expanding volatility in mind, or wait for the breakout.

3. Calling it a breakout too early. A single bar poking past a line is not confirmation. Wait for a close beyond the line, preferably with a volume increase.

4. Confusing it with a triangle. Triangles narrow; broadening formations widen. Drawing the lines wrong leads to the opposite trade.

5. Ignoring the high failure rate. Even confirmed broadening breakouts fail and pull back more often than tidier patterns. Size the position for that uncertainty.

Frequently Asked Questions

What is a broadening formation in simple terms? A broadening formation is a chart where price swings get bigger over time, with the highs rising and the lows falling. The trading range fans out like a funnel.

How does a broadening formation affect investment decisions? It warns that volatility is rising and clean trends are unlikely inside the range. Most traders stand aside until price closes outside one of the diverging lines, then trade the confirmed breakout.

What is a real-world example of a broadening formation? A stock that whipsaws with progressively wider daily swings around an uncertain earnings period or a market top often prints a broadening formation on the daily chart.

How can investors avoid the chop in a broadening formation? Wait for a confirmed close beyond a trendline on rising volume instead of fading each swing inside the range. Place stops with the expanding volatility in mind, not just past the last pivot.

How is a broadening formation different from a triangle? A triangle has converging trendlines and a shrinking range as price coils, while a broadening formation has diverging trendlines and an expanding range.

Sources

1. Bulkowski, Thomas. "Broadening Tops." thepatternsite.com. https://thepatternsite.com/bt.html
2. Bulkowski, Thomas. "Broadening Bottoms." thepatternsite.com. https://thepatternsite.com/broadb.html
3. StockCharts ChartSchool. "Chart Patterns." https://chartschool.stockcharts.com/table-of-contents/chart-analysis/chart-patterns
4. Investopedia. "Broadening Formation." https://www.investopedia.com/terms/b/broadeningformation.asp

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.