Broadening Formation

Posted in Finance, Accounting and Economics Terms, Total Reads: 338

Definition: Broadening Formation

Broadening Formation is a technical chart analysis used in the financial markets to evaluate the trends of commodities, stocks, currencies, securities and other assets.

When the trend lines for a particular trading asset are captured graphically and it is found that they diverge from their starting point, then the graph is said to be a broadening formation. As we go from left to right of the chart, the points diverge from the starting point and form the shape of a megaphone (as shown in the figure below). Thus it is also called a megaphone chart.

This kind of formation occurs when there is a high volatility in the market, and the security (or the traded commodity) moves highly with little direction. The price swings unpredictably, with the traders having no clear idea of the next swing. The higher points become higher and the lower points become lower as the trend progresses. This gives the widening pattern to the chart. It resembles a reverse version of a symmetrical triangle, and it is quite unlikely to occur, but when it does, it helps identify the swing in the trading commodities. The broadening formation is believed to be more prominent in the bearish markets (when prices are expected to fall), but the stock markets have seen both down-trending and up-trending broadening formations.

It is generally assumed that the broadening formation requires five points, of high peaks and low troughs, for the traders to decide which point to enter into the market to buy or sell the traded security, but there is no evidence to prove this claim till now. All these reasons make the broadening formation very difficult to perceive and trade along with it.



Looking for Similar Definitions & Concepts, Search Business Concepts

Similar Definitions from same Category: