The ascending triangle is one of the more common stock technical analysis patterns today. Traders often look for breakouts from this triangle pattern to provide profitable trading opportunities. Ascending triangles are bullish formations that anticipate an upside breakout. This article will help you discuss how to spot this pattern on a chart and use it as a trading strategy.
What Is an Ascending Triangle?
An ascending triangle is a formation that can signal buy opportunities on a stock chart. A horizontal line is drawn along the highs and a rising trendline along the low price points to create the pattern. These two lines form a triangle.
The ascending triangle is created when there is a horizontal resistance level and an ascending support level. The market failing to break through a specific price point multiple times creates the resistance level. The market consistently finding support at higher levels creates the ascending support level. You can see this pattern on any time frame chart, but it is most commonly available on daily charts.
The ascending triangle is generally considered a bullish pattern because it leads to a bullish breakout. The breakout happens when the market finally pushes through the horizontal resistance level and starts to move higher. When this happens, traders often buy call options or stocks to take advantage of the upside potential. The ascending triangle pattern can also trade other markets such as forex, commodities, and cryptocurrencies.
If you spot an ascending triangle pattern on a chart, there are a few things that you need to look for to confirm that it is indeed a good pattern.
- First, you want to ensure that the ascending support level is not too steep. If it is, the setup might not be valid and could lead to a false breakout.
- Second, you want to ensure that the horizontal resistance level is clearly defined. The market might not be ready to break out if it isn’t.
- Finally, you want to make sure that there is volume confirmation. As the market approaches the horizontal resistance level, you should see an increase in volume. The volume spike shows that more traders are interested in the market and that the breakout is more likely to occur. If there is insufficient volume, the breakout will likely only be temporary.
Now that we know what an ascending triangle pattern is and how to spot it, let’s look at some examples.
The first example is of an ascending triangle on a daily chart. As you can see, there was a horizontal resistance level around the top price point. The market failed to break through this level multiple times before finally breaking out to the upside. This move was confirmed by an increase in volume, which is what we want to see. After the breakout, the market continued to move higher, and traders who bought call options or purchased stocks could have made a profit.
You can easily see that the ascending triangle is a straightforward pattern. A horizontal trendline forms it at resistance and a rising trendline at support. In this case, we would want to wait for a breakout above the horizontal trendline before entering a long position. We would place our stop loss just below the rising trendline and target the same height as the triangle for our profit target.
Steps to Trade an Ascending Triangle Pattern
Here are the steps to trade this pattern on a stock chart:
1. The first step is to identify the pattern. For an ascending triangle to form, you must see a clear trendline and horizontal resistance. The trendline is created by connecting the lows, and the horizontal resistance is created by connecting the highs.
2. The next step is to wait for a breakout. A breakout occurs when the stock price moves above the horizontal resistance line. You can create an alert above the horizontal line to alert you when the breakout has happened so that you can not have to watch your computer all day.
3. The third step is entering a long trade after the breakout. Put your stop-loss just below the recent low, and take profits at the next horizontal resistance level. For a more conservative approach, you can also wait until the price breaks and then returns to the horizontal line and retest that area before entering a trade.
You may wonder what happens if the stock price breakouts to the downside and whether you should short the stock. It all depends on the overall trend of the stock. Usually, the ascending triangle does appear in an uptrend. However, it can also be formed in a downtrend. In this case, you would need to rely on your interpretation of the market and the chart’s information to determine your confidence level in shorting the stock.
Tips to Ascending Triangles
The ascending triangle is a handy chart pattern for technical traders. Here are the key things to remember when trading ascending triangles:
– Look for ascending triangles that form in an uptrending market. Trading them in an uptrend will increase the chances of a successful breakout to the upside.
– The horizontal trendline represents resistance, while the rising trendline represents support.
– The breakout strategy is to buy when the price of an asset moves above the upper trendline.
-Stop losses can go just below the lower trendline.
– Target the same height (at a minimum) as the triangle for your profit target.
Ascending Triangles vs Descending Triangles
This article primarily focuses on ascending triangles. However, there is also a descending triangle pattern that is the complete opposite of the ascending triangle. So, it can be traded similarly to the ascending triangle, except the trading setup is bearish.
Ascending Triangle
The ascending triangle develops within a bullish trend, while a descending triangle develops within a bearish trend. A descending triangle is often considered a signal for traders to take a short position and accelerate the breakdown. Let’s take a look at how these formations look and what their differences are.
An ascending triangle is characterized by a flat top and a rising bottom. This pattern forms when the bulls cannot push the price higher, but can still hold it above the previous lows. The ascending triangle is considered a bullish formation that typically signals the continuation of an uptrend.
Descending Triangle
On the other hand, a descending triangle has a flat bottom and a falling top. This pattern forms when the bears cannot push the price lower, but can still hold it below the previous highs. The descending triangle is considered a bearish formation that typically signals the continuation of a downtrend.
- The main difference between these two triangle patterns is their orientation. An ascending triangle is bullish, while a descending triangle is bearish. This difference is because ascending triangles form within uptrends while descending triangles form within downtrends. As such, ascending triangles are typically seen as continuation patterns while descending triangles generally are seen as reversal patterns.
- Another difference between these two formations is their shape. An ascending triangle has a flat top and a rising bottom, while a descending triangle has a flat bottom and a falling top. This difference is because ascending triangles are formed by the bulls pushing the price higher but failing to break out, while descending triangles are created by the bears making the price lower but failing to break down.
- The last difference we want to mention is how these patterns are traded. An ascending triangle is typically traded by buying a breakout of the highs, while a descending triangle generally is traded by selling a breakdown of the lows. This difference is because ascending triangles are considered bullish continuation patterns, while descending triangles are regarded as bearish reversal patterns.
Summary: Ascending Triangle Pattern
The ascending and descending patterns are simple to identify on charts and can be very helpful in confirming price movement for stocks or equities. Both swing and day traders can use these chart patterns to trade.
Are you interested in learning more chart patterns that can help you day trade?
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