Tuesday 24th January 2012

Broadening Patterns can be tough to trade. These are patterns which alternate through a cycle of increasingly higher highs and lower lows, as demonstrated in today's Euro chart.





As you can imagine, broadening patterns can destroy breakout traders, as breakout after breakout fails.

How can we establish a bias for price action in such a pattern?

One method is to look for what is termed a partial rise or a partial decline. A partial rise is demonstrated below, in which price rallies from the lower pattern edge and is unable to rise all the way to the top, producing a lower high and falling back towards the lower edge. Upon producing a partial rise, my bias is always for a breakout down. Ideally I'll be seeking entry short well above the lower edge of the pattern. This will allow for a scratch of the trade if the breakout should not eventuate. Either way, the bias will remain bearish for subsequent attempts at breakout, unless price can rally above the partial rise swing high.





A partial decline is of course the opposite. Price falls from the upper edge of the pattern but reverses before reaching the lower edge, producing a higher low. The bias is then bullish with expectation of a breakout higher. Again, I'll ideally be seeking entry within the pattern with sufficient room to scratch if the breakout does not eventuate.

In both cases, if no trade opportunity is available within the pattern in the direction of this bias, then await a breakout pullback opportunity. Given the previous failures of the straight breakouts, my preference is to avoid them at all costs.

Looking at the outcome of the Euro's partial rise... this one failed to break out. Hey... I never said this was easy! The 1.3000 level continued to provide support for several further attempts to break downwards. Note though that the swing high of the partial rise was never broken, allowing us to keep a bearish bias until the eventual break. It was a messy session and a tough one to trade. Hopefully this blog post will help make the next Broadening Pattern just a little easier for you!