The Broadening Top pattern forms when the price of a pair progressively makes higher highs (1, 3) and lower lows (2, 4) 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 Top from a Broadening Bottom is that the price of the pair is rising 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 little or no direction. It potentially indicates growing investor nervousness and indecisiveness.
Trade idea
Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a pair or a call option at the upward breakout price/entry point. To identify an exit, compute the target price by adding the pattern height (H on the chart) to the breakout price. The pattern height is difference between the pattern’s highest high and its lowest low.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to sell at or below the breakout price.