Key takeout
-
The Bitcoin Megaphone pattern has at least two highs and two lows, forming an expanding structure.
-
Connecting these highs and lows to trendlines creates a megaphone-like look, reflecting market instability.
-
Formations increase volatility and price fluctuations become more pronounced over time.
-
Depending on the direction of the trend, this pattern can indicate potential breakouts either upward (bulwark) or downward (bearish).
The megaphone pattern, also known as the expansion formation, is a technical analysis chart pattern that traders observe in a variety of financial markets, including cryptocurrencies such as Bitcoin.
This pattern is characterized by a unique shape similar to a megaphone or an expanding triangle, meaning increased volatility and market indecisiveness. The characteristics to be defined are:
-
High and low and low: This pattern consists of at least two high highs and two low lows, forming an expanding structure. Each subsequent peak is higher than the previous peak, and each trough is lower, branching off the trend line.
-
Trend Line Fork: When trend lines are drawn to connect higher and lower lower values, they branch out and form a spreading pattern that resembles a megaphone.
-
Improved volatility: The formation of this pattern indicates that volatility increases as price fluctuations become more pronounced over time. This reflects the struggle between buyers and sellers, leading to a wider price movement.
Did you know? Bitcoin megaphone trading is different from traditional megaphone trading in that the physical megaphone is not involved in the process.
1. Bullish Megaphone Layer
Variations of this pattern suggest a potential breakout in the reverse direction.
-
First uptrend: Prices start with an upward trend and reach their initial peak (point 1).
-
First retracement: A pullback will occur, creating a low low (point 2) that is still above the start level of the previous trend.
-
Higher and higher levels: Prices rise again, forming a higher high above the previous high (point 3).
-
Low expansion: A more pronounced drop continues, leading to a lower price (point 4), increasing the range of price fluctuations.
-
Breakout and continuation: Prices exceed resistance (point 5) and confirm bullish breakouts.
2. Bearish megaphone layer
This version of the pattern indicates a potential shortcoming breakout.
-
First Down Trend: The price starts with a downward movement and sets the first low (point 1).
-
First retracement: A minor upward correction follows, forming the bottom (point 2).
-
Low expansion: New low form (point 3), further expanding the range.
-
Higher and higher levels : Prices will skyrocket again, but they still struggle to surpass their previous highs (point 4).
-
Breakout and flip: Prices fall below the support line (point 5) to confirm bearish breakouts.
Did you know? The massive breakouts from the megaphone pattern show strong market beliefs and confirm the real movement. Low volume? It's probably a fake and the price is reversed. Remember, wait for the volume spikes before you enter.
The history of megaphones in Bitcoin trading
The megaphone pattern, or the expansion layer, appeared at various pivotal moments in the history of Bitcoin trading.
1. Initial: 2013–2014
In the year of Bitcoin (BTC), extreme volatility created an expansionary layer. During this period, traders focused on megaphone patterns (often bearish tints) reflecting wild price fluctuations as the market struggled to find a balance.
These early examples have since not been documented, but have since become reference points for understanding how a chaotic market situation manifests as megaphone formations.
2. Bearish style from late 2017 to late 2018
A bearish megaphone pattern appeared on the daily charts as Bitcoin surged towards its then-$20,000 in late 2017. This formation is characterized by branching trend lines with highs and lows, indicating indecisiveness and the installation of sales pressure.
Many technical analysts saw it as a warning sign of an imminent reversal. This is a prediction that was realized through the dramatic revisions we experienced in early 2018.
3. Bullish turn in early 2021
In early 2021, as Bitcoin approached a $60,000 threshold, traders observed bullish megaphone patterns being formed over multiple time frames. This pattern, characterized by gradually higher and higher lows, indicates a period of increasing volatility combined with careful optimism.
Subsequent breakouts confirmed strong bullish momentum, and the validity of the pattern strengthened its validity as a predictor tool for mature markets.
Megaphone pattern trading strategy
In this section we explore many trading strategies that are compatible with megaphone patterns.
1. Megaphone breakout trading
Breakout megaphone pattern trading involves entering the trade if the price breaks decisively from the boundaries of the pattern with a strong volume check.
a. Key Level Identification
-
Draw up and down trend lines: The high and low values of the pattern are connected to form the shape of a megaphone. These trend lines mark important resistance and support levels.
-
Check your breakout zone: In bullish scenarios, the upper resistance line is the key zone for monitoring breakouts. In a bearish scenario, focus on the support line below.
b. Check the volume
-
Find the volume surge: A surge in volume indicates strong market participation, as prices violate resistance (bulwark) or support (bearish).
-
Reduce false breakouts: If the volume is weak in a breakout, there is a higher chance that the false movement will return to the pattern.
c. Entry Points
Did you know? Positioning a stop loss inside the megaphone will help prevent excessive losses if the breakout fails and the price returns to the pattern, and add protection in the volatile market.
d. Profit target
Measure the height of the pattern to find the vertical distance between the lowest point and the highest point, and use a portion of this measurement (typically about 60%) to determine a balanced take pro bit level.
By predicting that percentage from breakout points, traders can set realistic targets while maintaining a favorable risk-reward ratio, whether they exceed upper resistance (in bullish scenarios) or below low support (in bearish scenarios).
2. Swing Trading in Patterns
Swing trading within the megaphone pattern involves exploiting the interim price movement between its support and resistance boundaries without necessarily waiting for a critical breakout.
a. Identify important rows
-
Top resistance (R1, R2): These lines represent zones where prices are likely to encounter sales pressure.
-
Pivot Line: Midpoint references that may act as temporary support or resistance depending on the direction of price movement.
-
Low support (S1, S2): A zone where purchasing pressure appears.
b. Find a purchase signal near support
With a bullish megaphone, consider entering a long position near the lower support line (S1 or S2), especially if you see the formation of a bounce or bullish candlestick.
Check for signals indicating an increase in oscillator (RSI, Stochastics, etc.) or volume and show changes in momentum.
c. We sell signals that are close to resistance
With a bearish megaphone (or even within a bullish megaphone with a comfortable short selling), traders can look for short entries near the upper resistance line (R1 or R2).
A reduction in the candlestick inversion pattern or volume at these resistance levels may enhance the possibility of price reversal.
d. Stop losses and earn profits
Just above the resistance line (for example, slightly above R2) minimize losses if prices rise.
To win a commercial target, consider coming out near the pivot line or initial support (S1). For strong downward momentum, you will get a partial profit at S1 and aim for S2 in the remaining position.
e. Use the pivot line as the decision zone
The central pivot line often acts as a short-term inflection point.
-
Above the pivot: Bias may be bullish and prefer a long position.
-
Under the pivot: The bias may be bearish and prefer shorter positions.
If the price is consistently facing a clear direction around the pivot line, wait for either the support or resistance level to see your next swing.
f. Combine volume and indicator
Look for volume spikes in each support or resistance test. An increase in volume when prices bounce off support or reverse from resistance can indicate stronger movement.
Additionally, tools such as relative strength index (RSI) and moving average convergence/divergence (MACD) can help you check for overbuying/excessive conditions and strengthen the case of inverted trade.
3. The false breakout strategy
A false breakout megaphone pattern trading involves recognizing a price when it is temporarily breached by megaphone support or resistance.
In such cases, instead of chasing the breakout, traders look for confirmation of inversion before entering countertrend trade.
This strategy requires identifying key trend lines that define the pattern, monitoring the volume of weak breakout signals, re-entering the formation, placing a stop loss order within the pattern, limiting losses based on the measured height of the formation, and setting profit targets.
Risk Management and Considerations
Given the inherent volatility of Bitcoin and the wild price fluctuations characteristic of megaphone patterns, robust risk management is essential to protecting trade capital. Below are some important strategies to incorporate into your trading plan:
1. Volatility recognition
-
The enlarged range of megaphone patterns means an increase in uncertainty. Recognize that a rapid swing can lead to both significant losses as well as significant gains.
-
It closely monitors market sentiment and prepares for a sudden reversal, especially during a false breakout where a low volume could indicate a lack of conviction.
2. Position Sizing and Leverage
-
Position Sizing: Determine your position size based on the maximum risk you are willing to take (usually 1%-2% of your trading account).
-
Careful use of leverage: Leverage can amplify profits, but increases potential losses equally. Use leverage sparingly and make sure the risk parameters are compatible with the amplified swing.
3. Stop Loss and Take Pro Bit Levels
-
Stop Order: Place stop loss orders within the boundaries of the megaphone formation. This positioning can help limit losses if prices unexpectedly reverse.
-
To set profit targets: Calculate profit targets by measuring the vertical distance of the pattern and projecting a reasonable percentage from the breakout point. This allows you to ensure profits while maintaining a favorable risk-to-reward ratio.
4. Adaptive risk control
Market conditions can change rapidly. Continuously reevaluate your transactions:
-
Monitoring amount and momentum: Use volume spikes and momentum indicators to dynamically adjust stop loss or take probit levels to ensure that exit strategies adapt to evolving markets.
-
Using trailing stop: Consider using trailing stop orders to lock in profits, as prices will move in your favor while preserving space for potential profits.
That's it – Happy Megaphone Trade!
