What is an extended training?
An expanded formation is a price chart pattern identified by technical analysts. It is characterized by increasing price volatility and schematized by two diverging trend lines, one upward and the other downward. It usually occurs after a significant rise or fall in the price action of securities. It is identified on a chart by a series of upper pivot highs and lower pivot lows.
The chart below shows an example of a classic widening formation.
Key points to remember
- A widening formation is a technical chart pattern representing a widening channel of high and low levels of support and resistance.
- Broad formations indicate increasing price volatility.
- Swing traders can capitalize on the swings contained in a widening formation.
Understanding Extended Trainings
Broadening formations occur when a market experiences increased disagreement among investors about the appropriate price for a security over a short period of time. Buyers are increasingly willing to buy at higher prices, while sellers are increasingly motivated to take profits. This creates a series of higher intermediate peaks in price and lower intermediate lows. When connecting these highs and lows, the trendlines form a widening pattern that resembles a megaphone or an inverted symmetrical triangle.
Price may reflect random disagreement among investors, or it may reflect a more fundamental factor. For example, many countries experience expanded formations due to increased political risk ahead of an upcoming election. Different poll results or candidate policies can cause a market to become very bullish at times and very bearish at others. Broad formations can also occur during earnings season when companies may release different quarterly financial results that can cause bouts of optimism or pessimism.
These formations are relatively rare under normal long-term market conditions, as most markets tend to move in one direction or the other over time. For example, the S&P 500 has consistently risen over the long term; therefore, formations are more common at times when market participants have begun to deal with a series of troubling hot topics. Topics such as geopolitical conflicts or a change in direction in Fed policy, or especially a combination of the two, are likely to coincide with such formations.
Take advantage of the expansion of training
Wider formations are generally bearish for most long-term investors and trend traders, as they are characterized by rising volatility with no clear movement in one direction. However, this is good news for swing traders and day traders, who try to take advantage of volatility rather than relying on directional movements in a market. These traders rely on technical analysis techniques, such as trend lines or technical indicators, to quickly enter and exit trades that capitalize on short-term moves. Trendlines help them anticipate turning points where they are able to profit from trading decisions if they time the trade successfully or cut their losses if the price moves against their position.
For example, a swing trader may identify a widening formation and take long positions when price reaches a lower trendline and/or short positions when price reaches an upper trendline. The widening of these two trend lines means that the potential profit for each swing trade is greater than the previous swing. These conditions are not true whether the trend lines were converging (as in a symmetrical triangle) or parallel (as in a price channel).
In addition to looking at trendlines, these traders can look to momentum indicators to identify the likelihood of a near-term reversal. Day traders also tend to see these patterns more often because they focus on shorter time frames, lasting minutes or hours. At these times, enlargement formations tend to be more frequent.
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