Traders use the ascending triangle chart pattern to help capture buying opportunities. While generally categorised as a bullish pattern, the ascending triangle is typically a continuation formation, as a consolidation phase within an upward price trend.
It can also be observed as a reversal pattern following a pronounced downward price trend. Traders tend to use an upside breakout from an ascending triangle pattern as good reason to hit the buy button.
An ascending triangle is formed by two trend lines; one line is drawn horizontally intersecting previous peaks that represent a resistance level, while the other is an upwardly sloping line that is drawn through consecutive price troughs.
Traders tend to see a buying opportunity when the price breaks out above the upper horizontal line as the price will often rise sharply higher once a meaningful move above this level takes place.
In general, a greater number of points along the upper trend line tends to make for the strongest ascending triangle signal. It shows that this price level really has been a formidable point of resistance, so a breakout above it is likely to be all the more significant.
As a minimum requirement, the ascending triangle formation requires at least two high points across the horizontal line and two points along an upwardly sloping line at the bottom.
Trading volumes tend to diminish while the ascending triangle pattern is maintained, defining it as a typical consolidation phase. It’s therefore crucial that a price breakout above the horizontal trend line is accompanied by higher trading volumes to ensure that it is a valid buying signal.
A breakout above the resistance level could be an indication that big institutional investors are buying the asset, precluding an even sharper upward price move.
On the other hand, if the price subsequently falls well below the horizontal trend line then it could be an indication that a valid breakout from the ascending triangle pattern has, in fact, not occurred. Instead, we could potentially witness a reversal of the long-term upward price trend.
Trading the ascending triangle
As an example, suppose bitcoin rises from $7100 to $8000. We then see a retrace to $7300. The next upward price move sees bitcoin back at around $8000 again, while the next retrace sees bitcoin at $7500.
This pattern continues with bitcoin back at $8000, which we know to be the price point that denotes the upper horizontal line of the ascending triangle. On the final retrace in the pattern that forms the next point on the upwardly sloping lower line, bitcoin’s price is $7700.
When a breakout finally occurs, taking bitcoin to $8100 on higher trading volumes, we take a long position. At the end of the trading day, bitcoin is priced at $8850 and we decide to close out our position, taking a large profit.
In this scenario, a typical price target for the buy trade could be around the $8900 mark. This is the height of the triangle ($8000 − $7100) plus the breakout level ($8000).
We could choose to put on a stop loss to guard against a retrace at the point of the last trough in the pattern. So, in this case, we could elect to implement a stop loss at $7700.
Following the breakout, the horizontal trend line of the original ascending triangle pattern could be viewed as a key support level. In our bitcoin example, this is at $8000.