The Ascending Triangle Pattern: What it Is and how to trade It
A chart pattern utilized in technical analysis is an ascending triangle. Price movements that enable the drawing of a horizontal trendline along the swing highs and a rising trendline along the swing lows make it possible. They intersect to create a triangle. Traders frequently look for triangle-pattern breakouts. Either an upward or downward breakthrough is possible.
Since the price often moves in the same direction as the trend that existed shortly before the triangle formed, ascending triangles are also known as continuation patterns.
CFA Institute, “Technical Analysis.”
An ascending triangle can be traded because it offers a distinct entry point, profit goal, and stop-loss level. It may be compared to a triangle that descends.
What Can You Infer from the Ascending Triangle?
Since an ascending triangle is typically considered a continuation pattern, whether it appears during an upswing or a decline is important. Depending on how the price exits the triangle after the breakout, traders often aggressively purchase or sell the asset. As the price breaks out of the pattern, increased volume indicates growing interest, which helps to confirm the breakout.
There must be at least two swing highs and swing lows to form the trendlines of the ascending triangle. But more frequent trendline contacts typically lead to more consistent trading outcomes. Given that the trendlines are intersecting, if the price moves repeatedly within a triangle, the price action gets more coiled and will likely result in a greater breakout in the future.
When the market moves, volume is often higher than when it is consolidating. Since a triangle is a consolidation form, the volume will often decrease throughout an ascending triangle. As already noted, when a breakthrough occurs, traders watch for an increase in volume since this indicates that the price will likely continue to move in the breakout direction. When a price breakout occurs with little volume, it is a red flag that it is weak. This can indicate that the price will enter the pattern once more. We refer to this as a fake breakout.
When the price breaks out, an entrance is often made for trading. If the breakout occurs on the upside, buy; if it occurs on the downside, short or sell. A stop loss is set up just beyond the pattern’s opposing side. For instance, a stop-loss is positioned immediately below the lower trendline if a long trade is entered on an upside breakout.
A profit objective may be calculated based on the height of the triangle added or deducted from the breakout price. The triangle’s thickest point is utilized. The price goal is $5 plus the upside breakout point multiplied by the triangle’s $5 high. The profit objective is the breakout point minus $5 if the stock breaks lower.
An Illustration of the Ascending Triangle
Here, a downtrend causes an ascending triangle to form, and the price keeps falling after its breakout. The profit objective was reached after the breakthrough. A short entry or sell signal was given when the price dropped below the lower trendline. Just above the upper trendline, a stop-loss might be put in place.
Wide patterns like this have a larger risk-reward ratio than patterns that gradually become tighter. The profit objective is still based on the greatest portion of the pattern as it narrows, but the stop loss gets lower as the pattern gets closer to the breakout point.
What Sets an Ascending Triangle Apart from a declining triangle?
These triangle patterns are continuation patterns, although they have different aesthetics. The bottom trendline of the descending triangle is horizontal, while the top trendline is downward. The ascending triangle has a rising lower trendline and a horizontal upper trendline; this is the reverse.
Limitations of Ascending Triangle Trading
Triangles and chart patterns generally have the potential for false breakouts, which is their principal drawback. Price could leave the pattern to return to it later, or it might even continue to break out on the other side. As the price approaches the trendlines but fails to gain momentum in the breakout direction, a pattern may need to be redrawn numerous times. Ascending triangles offer a profit objective, but that target is only an estimate. The price might significantly surpass or fall short of that objective.
Ascending Triangle Psychology
As with other chart patterns, ascending triangles reveal the underlying psychology of the market players. The ascending triangle’s horizontal line is reached because buyers keep pushing the price upward. The horizontal line depicts a level of resistance or the point at which sellers enter the market to drive prices back down.
Buyers start demonstrating their commitment as the price begins to fall from the horizontal resistance level, preventing it from reaching the recent low and causing the trend to turn upward once more at a higher swing low. In other words, the ascending triangle’s bottom border, an upward-sloping trendline, serves as support, the point at which buyers enter the market to stop the price from dropping any lower.
The price oscillates between the lower trend and horizontal resistance lines in a clearly defined ascending triangle pattern. A showdown between upward and downward pressure might decide how the price will move out of the pattern when the triangle’s lines ultimately intersect. The price will either break out above the resistance level as it gets closer to the triangle’s vertices, indicating more gains, or it will break below the support level, raising the possibility that the price will fall.
What is a Pattern of Continuation?
A chart’s continuation pattern indicates a higher chance that the asset’s price will exit the pattern, moving in the same direction as before. Technical analysts employ several continuation patterns, like the ascending triangle, to indicate that the current price trend will continue. The shapes of flags, pennants, and rectangles are more instances of continuation patterns.
What are the levels of support and resistance?
On a price chart, support and resistance levels indicate areas where there is a chance that the current trend could slow down or reverse. Support occurs when a downtrend is anticipated to halt because of a concentration of demand. In contrast, resistance occurs when an uptrend is anticipated to pause because of a concentration of supply. The horizontal upper limit of the triangle denotes resistance in an ascending triangle pattern, while the upward-sloping lower trendline suggests support.
How Can the Ascending Triangle Chart Pattern Be Traded?
When the price of a security breaks above or below the lines of an ascending triangle, traders often open a position on that security. A move below the lower trendline shows that selling or shorting the asset may be beneficial. At the same time, a spike in price above the horizontal resistance level suggests that it may be a good opportunity to purchase. Traders frequently safeguard their positions by setting a stop loss outside the pattern’s opposing side. It might be helpful to start at the breakout point and then add or deduct the triangle’s height at its thickest point to achieve a profit objective.
Technical analysis chart patterns called ascending triangles appear when an asset’s price oscillates between a horizontal upper trendline and an ascending lower trendline. Ascending triangles are sometimes referred to as continuation patterns since the price commonly moves in the same direction as the trend before the triangle’s creation. Before taking a position, traders frequently wait for the price to break above or below the pattern. The ascending triangle pattern is extremely helpful for traders because it provides a distinct entry point, profit objective, and stop-loss level.
Conclusion
- A triangle’s trendlines must follow at least two swing highs and lows.
- Ascending triangles are regarded as continuation patterns because, although this won’t always happen, the price will often break out of the triangle in the dominant price direction before the triangle. Any breakout that changes course is remarkable.
- If the price moves above the pattern’s peak, a long trade is entered.
- If the price drops below the lower trendline, a short position is opened.
- Usually, a stop loss is set up on the side opposing the breakout, slightly outside the pattern.
- The triangle’s height at its thickest point determines a profit objective by adding or subtracting it from the breakout point.
