Last Updated on 17 March, 2020 by Therobusttrader
In trading and technical analysis there are numerous price patterns and formations that are used to predict future price moves. Some of the most common ones resemble different types of geometrical shapes, such as triangles or rectangles . In this article, we’ll look closer at a specific type of triangle that’s called “ascending triangle”.
An ascending triangle is a bullish price formation that forms in an uptrend, signaling its continuation. However, in certain cases an ascending triangle may form as a reversal pattern at the end of a bearish trend. Nevertheless, it’s a bullish price pattern, regardless of where it forms relative to the previous trend.
In this guide to the ascending triangle pattern, we’re going to look at some of the most important aspects of the pattern, including
- The definition and meaning of the ascending triangle
- How ascending triangles are used by traders
- How you can go about to improve the performance of the pattern and avoid false signals.
Definition of the Ascending Triangle: How to Spot the Pattern
As said an ascending triangle is a price pattern that usually occurs in a positive trend and signals a continuation of the current trend.
Here are the exact conditions that must be met for an ascending triangle to form:
- There must be two or more highs that form around the same level, which creates a horizontal line when connected with a line.
- The local lows, which should be 2 or more, get higher and higher for each reversal, which creates an upwards sloping line that converges with the horizontal line that connects the tops of the pattern.
- Preferably, the volume should contract as the pattern forms. This could be seen as a preparation for the coming breakout, which preferably should occur with heightened volume levels, showing that the market is getting revitalized with new market forces entering the scene.
While these are the conditions that apply to the pattern itself, you should also make sure that the market comes from a fairly long positive trend. The longer the trend has persisted, the more likely it is that an ascending triangle will lead to a positive breakout. People simply become accustomed to the prevailing trend direction, and assume that it must continue shortly. And most importantly, there usually are fundamental reasons for the positive trend that are unlikely to change in the near future.
One great example of a long trend is that which can be found in the stock market. If we spot an ascending triangle in one of the bigger market indexes, we at least know that the long term bullish bias is on our favor. This, by the way, is the reason why going long in the stock market is so much easier than going short!
What Does an Ascending Triangle Mean – What is the Price Doing?
Ascending triangles form when the market takes a pause in an ongoing trend, and gathers strength for an impending positive breakout.
In that sense, it’s a sort of consolidation pattern and quite closely resembles the rectangle pattern, with the key difference that the lower trend line is rising instead of being flat.
So what does this tell us about the prevailing market forces and their impact on the market?
There are a couple of things worth noting here:
- The highs remain at the same level. This indicates that buyers attempt to push prices higher several times, but fail due to excessive incoming selling pressure around those levels.
- The lows get higher and higher. This is an indication that despite the highs being made around the same levels, the bullish forces remain strong and defend prices at increasingly higher levels. This, in particular, adds to the bullish sentiment.
- Market volatility decreases, as the market moves further towards the tightening peak of the triangle. In general, extremely low volatility levels beget volatility explosions. In other words, we can expect quite volatile moves when the market finally moves past the upper resistance level.
- The market trend is positive, which usually means that the conditions are in favor of a positive rather than a negative move.
So, in short, you could say that the main traits of the ascending triangle that make it a bullish formation, are the rising long term trend and the fact that buyers manage to produce higher and higher lows.
How to Trade Ascending Triangles
Now that we have looked at the definition of the ascending triangle and what it tells us about the market, it’s time to discuss some common trading methods that involve the pattern.
Do remember that while the information provided below describes how many traders trade the pattern, it doesn’t necessarily mean that it’s a profitable approach. Results will vary a lot depending on the market and timeframe you choose, which is why we always recommend that you use backtesting before going live with any strategy!
With that said, let’s go through this step by step!
Step: 1 Identify the pattern
Of course, first of all, we need to identify that an ascending triangle is forming, which may be hard as the pattern yet hasn’t taken its full form.
Typically we demand that there must be a minimum of two highs and two lows, to be able to draw the lines that make up the triangle itself. However, the more highs and bottoms that can be connected with a line, the more certain we can be that there really is a triangle worth watching.
Step 2: Wait for a breakout above the upper trend line
The next step is to wait for a breakout above the upper resistance level, which traditionally is viewed as the buy signal.
However, false breakouts are common and you shouldn’t act solely on a move past the breakout level. Many times the market will just fall back, and get back into the body of the triangle.
To reduce the impact of false breakouts, many traders choose to add some distance to the breakout level. That way the market is given room to move, which means that it is less likely that the market gets past the breakout level due to random market movements.
Another technique that’s used quite often is to wait for the market to return back to the breakout level to see if it holds or not. If it reverses around that level, many traders will choose to go long, since the market shows that it respects the breakout level and now is ready to continue upwards.
The image below shows how the market first breaks out above an ascending triangle, and then falls back to the breakout level before it finally takes off again.
Step 3: Stop Loss and Profit Targets
- When it comes to the profit target, traders usually place it around a distance from the breakout level that’s equivalent to the widest distance of the triangle.
- When it comes to the stop loss, it’s common to place it slightly under the breakout level, to give the market some room to move and avoid false breakouts.
The image below shows the placement of the stop loss and the profit target.
Of course, these rules are not set in stone, and you may choose an approach that works better for you. Just remember that you most of the time should strive to keep a risk-reward ratio of 2:1 or more, meaning that a positive outcome results in twice the profit of a negative outcome.
How to Improve Triangles
Having covered how you can go about to trade the ascending triangle pattern, it’s time to look at three techniques that can be useful when it comes to reducing the chances of acting on false breakouts.
Gaps show us that the market is moving a lot between sessions, which usually indicates that there is a lot of momentum in the market. They may also be used to get a sense of whether buying or selling pressure is dominating at the moment. For instance, if most gaps are positive, it may be a sign that the coming breakout will be positive as well.
Sometimes you’ll see that the market gaps past the upper line of the ascending triangle. Generally, such behavior signals strength which adds to our positive view on the market.
2. The Length of the preceding trend
As we mentioned earlier in the article, the significance and length of the preceding trend can have quite an impact on the probability of a positive outcome. If the market has been trending upwards for a long time, it’s more likely that we’ll see a positive breakout than in those cases where the trend has just started.
In addition to the standard volume filter which demands that we see decreasing volume as the ascending triangle forms, you might also want to impose an additional volume filter.
One way could be to look at the volume of positive days relative to that of negative days. Preferably we’d like to see that positive days are formed with more volume than the negative days, which indicates that bulls seem to be stronger than bears.
Ascending Triangle VS Pennant
Those of you who know about the pennant pattern may have noticed that the ascending triangle, although not completely similar, indeed does resemble the former. And while both indicate the same thing about the market, there are two main differences.
- The most obvious difference is that the pennant preferably should have two lines that converge. In contrast, an ascending triangle has an upper line that’s horizontal.
- The second difference is the time both patterns take to form. While a pennant usually forms during a time period of just a few days, the ascending triangle may take several weeks or even months to form.
Although these two patterns aren’t the same, you’ll find that they’re used interchangeably in many cases. Especially when the length of the pattern is around 1 -2 weeks, which is around the time when a pennant starts to be seen as a triangle by many market participants.
Ascending Triangle VS Symmetrical Triangle
The ascending triangle belongs to a family of three triangle patterns, which are:
- Ascending triangles(as covered in this article)
- Symmetrical Triangles
- Descending triangles
Here are the main differences between the patterns. If you’re interested in learning more about each, you may read more in the articles that are hyperlinked below:
The descending triangle is the opposite version of the ascending triangle both in meaning and appearance. This means that it has a horizontal lower line, which is accompanied by a declining higher line.
A symmetrical triangle consists of a series of lower highs and higher lows, meaning that both the upper and lower lines are sloping towards another. As to the meaning, it’s a neutral formation which means that the meaning is dictated by the direction of the final breakout.
What’s the Success Rate of the Ascending Triangle?
Sometimes you’ll find some statistics regarding the success rate of the ascending triangle. And while these could provide valuable insights into how the pattern works, there are some aspects that you need to keep in mind.
Here they are:
- The definition of a triangle: Creating a rules-based definition of a triangle isn’t that easy if you want to do a proper backtest. Depending on the exact definition used, the results may vary quite a bit. The situation doesn’t get better if you choose to count triangles manually either, since the hindsight bias very well can make you skip triangles you would have taken in live trading.
- The Timeframe: All timeframes aren’t equal. You’ll find that different types of patterns work well on different timeframes.
- The Market: The same as above applies even more to the market. Most times you cannot trade the same strategy on several markets, which means that you need to tailor your approach to the conditions of the market you’re focusing on.
In other words, be sure to look closer at the methods that have been used to come up with statistics regarding the performance of any pattern. It may fluctuate quite a bit depending on the method and definition!
In this guide to the ascending triangle pattern, we’ve had a closer look at how you can use the pattern in your trading. We’ve also shared a couple of methods you can use to improve its performance and avoid false breakouts.
Before ending, we once again want to stress the importance of always testing what you’re going to trade, BEFORE you trade it. Most traders trust patterns of different kinds blindly, and lose money as a consequence. Our article on backtesting and how to build a trading strategy both deal with this topic in greater depth.