Most chart patterns contract – triangles, flags and pennants squeeze price into a tighter range before a move. The broadening top does the opposite. Highs get higher and lows get lower at the same time, the range expands, and the chart starts to look like a megaphone. It usually appears after a long rally and is a sign that the crowd has stopped agreeing about value.
What the pattern tells you
Each swing in a broadening top is bigger than the last. That means buyers are chasing higher and sellers are dumping lower – emotional, late-trend behavior. Institutions are typically distributing into the strength while retail traders are whipsawed by the swings. The pattern does not tell you the day the top is in, but it tells you the trend is tired.
How to trade it (and how not to)
- Do not trade the middle. Inside a broadening pattern there is no edge – every level is a coin flip.
- Fade the extremes with small size. The upper line in a broadening top is a short opportunity with the stop just above the most recent higher high; the lower line is a buy with the stop just below. Keep size small – the swings are large and the pattern is by definition volatile.
- Trade the resolution. The highest-probability trade is the break of the lower line after a failed test of the upper line: it confirms distribution, and the measured move is the height of the pattern.
Risk comes first
Broadening patterns punish traders who widen their stops to survive the swings. We do the opposite: smaller size, tighter defined risk, and we accept being stopped out of a few attempts. When the pattern finally resolves, the move is large enough to pay for them.
See also: the double top and Elliott Wave corrections, which broadening tops often complete.
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