The Broadening Bottom pattern forms when a pair price makes higher highs (2, 4) and lower lows (1, 3, 5) following two widening trend lines. The price is expected to move up or down past the pattern depending on which line is broken first. What distinguishes a Broadening Bottom from a Broadening Top is that the price of the pair is declining prior to entering the pattern formation.
This type of formation happens when volatility is high or increasing, and when a pair’s price is moving with high volatility but or no direction. It potentially indicates growing investor nervousness and a little indecisiveness.
Trade idea
If the price breaks out from the bottom pattern boundary, day traders and swing traders should trade with a DOWN trend. Consider selling the pair short or buying a put option at the downward breakout price level. To identify an exit, compute the Target Price by subtracting the pattern height from the breakout point. Pattern height is difference between patterns highest high and its lowest low.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.