Broadening bottoms can appear in two ways: in an upward breakout or in a downward breakout.

Upwards Breakouts

In an upward breakout, price trend is usually downward leading to the formation. An megaphone shape appears and make higher highs and lower lows that widen over time. After that, the pattern should break the upper trend line thus constituting an broadening bottom with a upward breakout formation.

This pattern is more reliable in a bull market than in a bear market since it will be breaking upward. Usually, 60% of this patterns reach the price target in a Bull Market, while only 50% do the same in a Bear Market. That is no surprise since we are having an upward breakout, a bull market will definitely help. What is quite a surprise is that one would expect that the percentage of meeting the price target would be way over 60% in a bull market. But it is not and you should definitely pay attention to that. Remember, always take your profits too soon.

Other characteristics of a broadening formation to be aware of:

  • Throwbacks hurt performance: if one does show up, run for the hills;
  • Tall patterns perform better than short ones;
  • Also narrow ones are better than wide ones;
  • Volume should be trending upward both in a bull and a bear market. If it is trending downwards, it is better to avoid the pattern and forget it.

Downward Breakouts

This one is pretty much the same as the broadening bottom with the upward breakout, the only difference is that this one it breaks downward.

Opposite to the one before, this one is more reliable in a bear market since it is breaking downwards, a bear market will enhance this breakout. A downward breakout is not as reliable as upward breakout and it meets price target approximately 30% of the time in a bear market and 45% in a bull market. So, if you can, try to trade only broadening bottom with an upward breakout.

Some signs to look for are:

  • It performs better when is trading near the year low;
  • Tall patterns are better than short ones;
  • A rising volume is a good indicator that the pattern might be valid.

Conclusion

Broadening Bottoms are not the best formation out there to trade in the stock markets, specially nowadays that many "old school teaching" are falling apart. They are not as reliable as some other patterns, therefore, we recommend to trade it carefully and always pay attention to the position sizing.

Author's Bio: 

Derek Shetrer is a professional trader and fund manager. He has been writing articles for 4 years now. You can see some of his articles at Gymnic Rody Horse and Patio Gazebo.