Right-Angled And Ascending Broadening Formation - The Reason Behind It

As you know, a right-angled and ascending broadening formation is formed basically

by a sloping up upper trend line and a horizontal bottom line where the stocks or commodity bounces around for a time. It is, as a rule, considered a bearish formation that can either make a breakout upward or downward (note, it breaks usually downward with better results than an upward breakout).

Reasons behind a pattern

So, why do formations occur like that, with an upward upper trend line and a horizontal line? This can be answered if we dig a bit into the market characteristics and what is happening with the security at the time. In general, the horizontal line is a perceived value that a security MIGHT bounce. So, traders and investors in general buy around this level where they believe they have the edge on the trade. That creates momentum that leads the stock up to new highs.

With a great profit made in a few days, volume start to decline and the security starts to move lower. Then, usually, it tries once more to perform a breakout of its upper trend line. When it fails, smart money starts to leave thus leaving the security unable to sustain its new highs. They do in order to lock their profits and wait for a better chance to once again, start a trade in this security with a better chance of success.

The security starts to tumble

After those events, the stock plummets and once again, it will bounce of the horizontal lower line. When it starts to rise in value again, investors, this time, want more than they had before, thus creating the sloping up trend line at the top of the broadening pattern formation. That goes on until one realizes that the stock will not move any higher that the trend line that has been formed and give up on buying it, even at the support level that he has bought if before. That sends the value of the stock crashing down until it reaches a value that is perceived as a solid support by investors.

Conclusion

There is always a reason why a pattern occurs the way it does. Do not go out in the web searching for the pattern, read its descriptions and then try to trade it: you will fail miserably. Always trying to dig deeper and find the real meaning behind those formations.

Right-Angled And Ascending Broadening Formation - The Reason Behind It

By: Derek Shetrer

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