How to Trade the Ascending Triangle
15:11, 6 September 2023
Welcome to Part 2 of our 7-part Power Patterns series. In this series, we'll be equipping you with the skills to trade some of the most powerful price patterns which occur on any timeframe in every market.
This week’s pattern, the ascending triangle can often precede fast and powerful breakouts. A strong understanding of this pattern is essential for any trader looking to trade with the trend.
We’ll teach you:
- Why the ascending triangle is our favourite type of bull flag
- How to trade this pattern with precision
- Why volume is this patterns perfect companion
I. Key characteristics of the ascending triangle:
The essence of this pattern lies in the convergence of support and resistance lines, effectively compressing the market toward an impending breakout.
- Horizontal resistance: The upper boundary of the ascending triangle acts as a significant resistance level, representing the area where selling pressure has historically been strong.
- Ascending trendline: The ascending trendline connects higher swing lows, indicating increasing buying pressure as higher swing lows are formed.
- Preceding trend: The ascending triangle should be preceded by a clear and obvious uptrend.
II. Not your average bull flag
In the realm of pattern analysis, ascending triangles are often grouped with bull flags, which encompass various patterns like pennants, wedges, symmetrical triangles, and bull channels. These patterns typically signify a pause in an uptrend, indicating a period of consolidation in the market.
However, during this consolidation phase, a subtle battle unfolds as buyers seek to accumulate while sellers aim to distribute. The challenge lies in determining which side has the upper hand and this is what makes ascending triangles so useful. Ascending triangles stand out from the crowd of bull flags due to one crucial distinction:
Ascending triangles signal increasing buying pressure
The sequence of higher swing lows meeting a horizontal resistance level serves as a unique indicator that buying pressure is on the rise even as the market consolidates. This particular characteristic sets ascending triangles apart from other bull flag patterns, rendering them notably more potent.
III. How to trade the ascending triangle:
Identifying the ascending triangle: Begin by scanning price charts for the distinctive pattern of higher swing lows connected by an ascending trendline and a horizontal resistance line. Confirmation of the pattern requires at least two reaction highs and two reaction lows.
Entry points: Look for entry opportunities when the price breaks above the horizontal resistance line, signalling a potential bullish breakout. Some traders may prefer to enter early by buying near the ascending trendline with a stop-loss order below it.
Stop-loss placement: To manage risk, place a stop-loss order below the ascending trendline or below the most recent swing low.
Price targets: Calculate potential price targets by measuring the height of the triangle's vertical distance and projecting it upward from the breakout point. Additionally, consider previous swing highs or key resistance levels as potential targets.
IV. The indicator which best complements the ascending triangle:
While the ascending triangle pattern holds its own in providing valuable insights, incorporating volume can significantly enhance its effectiveness. This additional dimension serves as both a quality filter and a confirmation tool before committing to ascending triangle breakouts.
Diminishing volume: During the development of the ascending triangle, a common occurrence is a gradual decline in trading volume.
Breakout confirmation: Ideally, a breakout should be marked by a noticeable surge in trading volume. This surge acts as a validation of the breakout's strength and serves as a crucial deterrent against false signals.
V. Managing risks and pitfalls:
False breakouts: Be aware that ascending triangles can sometimes experience false breakouts, where the price briefly moves above the resistance line before reversing lower. This highlights the importance of waiting for confirmation and monitoring volume during the breakout.
Risk management: Implement proper risk management techniques, such as position sizing, setting stop-loss orders, and diversifying your trading portfolio. This helps protect against unexpected market movements and potential losses.
Additional analysis: Don't rely solely on the ascending triangle pattern for trading decisions. Supplement your analysis with other technical indicators, fundamental factors, and market sentiment to gain a comprehensive view of the market.
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