Trading MegaPhone Patterns by Suri Duddella Megaphone patterns were first described in Richard Schabacker’s book (1932) "Technical Analysis and Stock Market Profits" as rare and intricate patterns. Megaphone patterns are considered both reversal and continuous patterns and usually appear at the major tops and market bottoms. This pattern may be also called as “Inverted Symmetric Triangle" pattern or “Broadening” pattern and usually, develops after a strong up or down trend in the stock price. Megaphone pattern formations have five distinct swings. Each swing is larger than the previous swing, which gives the formation its Megaphone appearance. The key swing points in the Megaphone pattern are structured with lower low troughs and higher high peaks and are connected by two diverging trendlines. Each of these swings may also include small minor swings. The key swings of the pattern are the first and the fifth swings, which show the reversal of major direction prior to the formation of the pattern. Another unique characteristic of Megaphone top/bottom patterns is that each swing’s increasing volatility triggers the reversals of upside and downside swings. Key pattern characteristics Fibonacci Ratio-based Swings Most geometric trading patterns exhibit Fibonacci ratio relationships in their swings. By that, each swing has a Fibonacci ratio relation to prior swings. Megaphone patterns exhibit this characteristic as each of its swing has a 1.27 to 1.62 extension ratio of prior swings in price and time. Megaphone Wedges Megaphone patterns forming with slightly angled trendlines (both in the same up or down direction) connecting the tops and bottoms are called “Megaphone wedges.” They may be also classified as a “Megaphone Ascending Wedge” or “Megaphone Descending Wedge.” Megaphone wedges have similar characteristics to conventional wedges. Megaphone wedges form near market tops and bottoms and have high reliability. After completion of wedges, breakout and breakdown levels of the upper or lower trendlines, broadening wedge patterns become very volatile. Megaphone Failures Megaphone patterns are highly reliable but not infallible. They trade better in longer-term timeframes than in shorter timeframes. Like most pattern failures, Megaphone pattern failure moves are explosive in the opposite direction. A critical area of retest and failure is the mid-channel line. In many cases of failure, the rally/decline stops at the mid-line to retest the prior trendline. Usually, the failure occurs on the last swing before a clear breakout/breakdown occurs. Trading Megaphone Patterns Megaphone patterns present two trading opportunities. 1. Trading the breakout as a Megaphone continuous pattern. 2. Trading the reversal as a Megaphone reversal pattern. Trades are placed after price reverses from 5th swing pivot level. Trading the Breakout (Continuous) To trade Megaphone breakout pattern as a continuation of its up-trend, trades are taken in the direction of the breakout/breakdown from the pattern. When a price bars close outside the pattern (above upper trendline) in the direction of the breakout/breakdown, a long trade is triggered.
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