Right Angle

Broadening Formations, Right Angled and Ascending - The Basics

Appearance

Broadening formations are a common type of formation that can show up either in the stock market or trading commodities. It is defined as having a horizontal bottom with higher highs following an up-sloping trend line. It can have two breakouts: upward or downward.

Upwards Breakouts

An upward breakout in a broadening right-angled and ascending formation is, as a rule, considered a short-term bearish reversal. This formation behaves better at a bull market condition since its breakout is going upward. Also, in a bull market, it tends to meet price target roughly 67% of times, a common standard between patterns. In a bear market it does not go as good and that and only meet price target around 43% of the time.

Surprising findings in a right-angled ascending broadening pattern formation

A breakout day gap, contrary to common belief, HURTS performance instead of helping it. This might happen since, with the gap, the profit is almost immediately triggering immediate action on most day traders that tends to end the trade by the end of the day. So, be aware of that.

Furthermore, in general tall and wide patterns perform the best among the patterns studies. Also, heavy breakout volume increases the chance of a successful broadening pattern formation to reach its price target.

Downward Breakouts

This one is pretty much the same as the upward breakout; it only differentiates itself as the breakout is downward instead of upward.

This one goes better following along a bear market since it will be breaking downward and it is considered a short-term bearish continuation pattern. When you are trading this pattern expecting a downward breakout, you must consider in which kind of market the pattern is occurring: if it is a bull market, you might be better of skipping this trade and look for another one since this patterns has only 32% of chance to reach its price target. In a bear market you might do better with a 51% chance of meeting its price target. Still, it is not a good percentage to trade with since you might as well flip a coin to decide your trade. With that you have 50% chance of being right and will not lose time trying to figure out if this a valid formation or not.

Conclusion and advice

Even though this pattern has an upward sloping trend line, it is in fact a BEARISH FORMATION. So, with that in mind, try to trade that in a bear market to enhance its capabilities.

A common strategy in trading pattern formations is to wait for the breakout to happen, watch it and then wait for a pullback to get in thus enhancing the confirmation of the pattern. Although this is a valid and a good strategy overall, in this pattern is NOT! Pullbacks hurt performance here and you will be better off jumping on that train as soon as the breakout starts. Just keep an eye on it and do not be afraid to get out of the trade if you feel uncomfortable or if things start to go the other way. Also, pay attention to a good position sizing and money management.

About the Author

Derek Shetrer is a professional trader. Derek has been working in the markets for a long time and have specialized in trading patterns. Also, Derek have fun writing articles about different subjects like Cozinhas Planejadas and Rody Horse.

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