Bitcoin’s megaphone pattern, explained: How to trade it

Key takeaways

• The Bitcoin megaphone pattern features at least two higher highs and two lower lows, forming an expanding structure.

• Connecting these highs and lows with trendlines creates a megaphone-like appearance, reflecting market instability.

• The formation signals heightened volatility, with price swings becoming more pronounced over time.

• Depending on the trend direction, the pattern can indicate potential breakouts either upward (bullish) or downward (bearish).

The megaphone pattern, also known as a broadening formation, is a technical analysis chart pattern that traders observe in various financial markets, including cryptocurrencies like Bitcoin. 

This pattern is characterized by its distinctive shape, resembling a megaphone or an expanding triangle, and signifies increasing volatility and market indecision. Here are its defining characteristics:

• Higher highs and lower lows: The pattern consists of at least two higher highs and two lower lows, forming an expanding structure. Each subsequent peak is higher than the previous one, and each trough is lower, creating diverging trendlines.

• Diverging trendlines: When trendlines are drawn connecting the higher highs and lower lows, they diverge, forming a broadening pattern that visually resembles a megaphone.

• Increased volatility: The formation of this pattern indicates heightened volatility as the price swings become more pronounced over time. This reflects a struggle between buyers and sellers, leading to wider price movements.

Did you know? Bitcoin megaphone trading differs from traditional megaphone trading in that no physical megaphones are involved in the process.

1. Bullish megaphone formation 

This variation of the pattern suggests a potential breakout to the upside.

• Initial uptrend: The price begins in an uptrend, reaching the first peak (point 1).

• First retracement: A pullback occurs, creating a lower low (point 2) that is still above the prior trend’s starting level.

• Higher high formation: The price rallies again, surpassing the previous high and forming a higher high (point 3).

• Lower low expansion: A more pronounced drop follows, leading to a lower low (point 4), extending the range of price fluctuations.

• Breakout and continuation: The price breaks above the resistance line (point 5), confirming a bullish breakout.

2. Bearish megaphone formation 

This version of the pattern signals a potential downside breakout.

• Initial downtrend: The price begins with a downward movement, setting an initial low (point 1).

• First retracement: A minor upward correction follows, forming a lower high (point 2).

• Lower low expansion: A new low forms (point 3), further widening the range.

• Higher high formation : The price spikes again but still struggles to hold above prior highs (point 4).

• Breakout and reversal: The price breaks below the support line (point 5), confirming a bearish breakout.

Did you know? A high-volume breakout from a megaphone pattern signals strong market conviction, confirming a real move. Low volume? It’s likely a fakeout, with the price reversing back. Remember, wait for a volume spike before entering.

Megaphone history in Bitcoin trading

The megaphone pattern, or broadening formation, has appeared at various pivotal moments in Bitcoin’s trading history:

1. The early days: 2013–2014

In Bitcoin’s (BTC) formative years, extreme volatility often produced broadening formations. During this period, traders noted megaphone patterns — often with a bearish tint — reflecting wild price swings as the market struggled to find balance. 

Although less documented then, these early examples have since become reference points for understanding how chaotic market conditions can manifest as megaphone formations.

2. The late 2017–early 2018 bearish formation

As Bitcoin surged toward its then-all-time high near $20,000 in late 2017, a bearish megaphone pattern appeared on daily charts. This formation, marked by diverging trendlines with higher highs and lower lows, signaled increasing indecision and mounting selling pressure. 

Many technical analysts viewed it as a warning sign of an impending reversal — a forecast that materialized with the dramatic correction experienced in early 2018.

3. The early 2021 bullish turn

In early 2021, as Bitcoin approached the $60,000 threshold, traders observed a bullish megaphone pattern forming on multiple timeframes. Characterized by a series of progressively higher highs and higher lows, this pattern indicated a period of heightened volatility combined with cautious optimism. 

The subsequent breakout confirmed a strong bullish momentum, reinforcing the pattern’s validity as a predictive tool in a maturing market.

Trading strategies for the megaphone pattern

In this section, we’ll explore a number of trading strategies compatible with the Megaphone pattern. 

1. Megaphone breakout trading 

Breakout megaphone pattern trading involves entering a trade when the price decisively breaks out of the pattern’s boundaries with strong volume confirmation.

a. Identifying key levels

• Draw upper and lower trendlines: Connect the pattern’s higher highs and lower lows to form the megaphone shape. These trendlines mark the critical resistance and support levels.

• Confirm the breakout zone: In a bullish scenario, the upper resistance line is the key zone to watch for a breakout. In a bearish scenario, focus on the lower support line.

b. Volume confirmation

• Look for a volume surge: As the price breaches resistance (bullish) or support (bearish), a spike in volume indicates strong market participation.

• Reduce false breakouts: If volume remains weak at the breakout, there’s a higher chance of a fake move back into the pattern.

c. Entry points

Did you know? Placing your stop-loss inside the megaphone can help prevent excessive losses if the breakout fails and the price slides back into the pattern, giving you added protection in volatile markets.

d. Profit targets

Measure the pattern’s height by finding the vertical distance between its lowest and highest points, then use a portion of this measurement (commonly around 60%) to determine a balanced take-profit level.

By projecting that percentage from the breakout point, whether above the upper resistance (for a bullish scenario) or below the lower support (for a bearish one), traders can set realistic targets while maintaining a favorable risk-to-reward ratio.

2. Swing trading within the pattern

Swing trading within a megaphone pattern involves capitalizing on the interim price moves between its support and resistance boundaries — without necessarily waiting for a definitive breakout.

a. Identify key lines

• Upper resistance (R1, R2): These lines represent zones where price is likely to encounter selling pressure.

• Pivot line: A midpoint reference that can act as temporary support or resistance, depending on the direction of the price move.

• Lower support (S1, S2): Zones where buying pressure may emerge.

b. Look for buy signals near support

In a bullish megaphone, consider entering long positions near the lower support lines (S1 or S2), especially when you see a bounce or bullish candlestick formation.

Confirm signals with oscillators (e.g., RSI, stochastics) or volume upticks indicating a shift in momentum.

c. Sell signals near resistance

In a bearish megaphone (or even within a bullish one, if you’re comfortable short-selling), traders may look for short entries near upper resistance lines (R1 or R2).

A candlestick reversal pattern or a decline in volume at these resistance levels can reinforce the likelihood of a price reversal.

d. Stop loss and take profit

Place your stop-loss just above the resistance line (e.g., slightly above R2) to minimize losses if the price breaks out higher. 

For take-profit targets, consider exiting near the pivot line or the first support (S1). In cases of strong downward momentum, take partial profits at S1 and aim for S2 with the remaining position.

e. Use the pivot line as a decision zone

The pivot line in the center often serves as a short-term inflection point:

• Above the pivot: The bias may be bullish, favoring long positions.

• Below the pivot: The bias may be bearish, favoring short positions.

If the price consistently hovers around the pivot line with no clear direction, wait for it to test either a support or resistance level to confirm the next swing.

f. Combine volume and indicators

Look for volume spikes at each support or resistance test. An uptick in volume when the price bounces off support or reverses from resistance can signal a stronger move.

Also, tools like the relative strength index (RSI) or moving average convergence/divergence (MACD) can help confirm overbought/oversold conditions, strengthening the case for a reversal trade.

3. False breakout strategy

False breakout megaphone pattern trading involves recognizing when the price briefly breaches the megaphone’s support or resistance, only to quickly return within its boundaries — a scenario often accompanied by low volume.

In such cases, instead of chasing the breakout, traders look for confirmation of the reversal before entering a counter-trend trade. 

This strategy requires identifying key trendlines that define the pattern, monitoring volume for weak breakout signals, and entering a trade once the price re-enters the formation, typically placing stop-loss orders within the pattern to limit losses and setting profit targets based on the measured height of the formation.

Risk management and considerations

Given the inherent volatility of Bitcoin and the wild price swings characteristic of the megaphone pattern, robust risk management is essential to safeguarding your trading capital. Here are several key strategies to incorporate into your trading plan:

1. Volatility awareness

• The expanding range of the megaphone pattern signifies increasing uncertainty. Recognize that rapid swings can lead to both substantial gains and equally significant losses.

• Monitor market sentiment closely and be prepared for sudden reversals, especially during false breakouts where low volume might signal 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 (typically 1%–2% of your trading account).

• Cautious use of leverage: While leverage can amplify profits, it equally increases potential losses. Use leverage sparingly and ensure your risk parameters can accommodate amplified swings.

3. Stop-loss and take-profit levels

• Stop-loss orders: Place stop-loss orders just within the megaphone formation’s boundaries. This positioning helps limit losses if the price reverses unexpectedly.

• Take-profit targets: Calculate your profit targets by measuring the vertical distance of the pattern and projecting a reasonable percentage from the breakout point. This ensures you secure gains while maintaining a favorable risk-to-reward ratio.

4. Adaptive risk controls

Market conditions can shift rapidly. Continuously reassess your trades by:

• Monitoring volume and momentum: Use volume spikes and momentum indicators to adjust your stop-loss or take-profit levels dynamically, ensuring that your exit strategy adapts to the evolving market.

• Using trailing stops: Consider employing trailing stop orders to lock in profits as the price moves in your favor while still allowing room for potential gains.

And that’s it — happy megaphone trading!