What is an ascending triangle and how to trade it
Ascending triangle is a bullish continuation pattern, typically regarded as a healthy correction for long-term market trends. Recognising the pattern and breakout can aid a trader in looking for good entry points for trading.
What is an ascending triangle
An ascending triangle is perhaps one of the most commonly recognised technical analysis patterns, also known as the bullish triangle, whereby the range of prices between high and low prices gradually narrows to form a triangle pattern awaiting breakout. Three forms of the triangle continuation patterns exist including the symmetrical, ascending and descending triangle patterns.
As the name suggests, the ascending triangle carries with it bullish connotations and typically forms in an uptrend, vice versa for the descending triangle. With the swing highs and lows of the pattern, one will be able to draw a flat trendline at the top and an upward sloping trendline at the bottom for the ascending triangle pattern. Breakout from the pattern usually takes place towards the upside as the bulls eventually take over following the consolidation, though prices can also breakout on the downside with strong resistances capping gains.
How to identify and interpret the ascending triangle
As with any technical analysis patterns, the most salient point may perhaps be the fact that the patterns rarely look textbook perfect. There are, however, a few tips that can make identifying an ascending triangle pattern easy for anyone new to trading or technical analysis.
Firstly, check to ensure it is an uptrend in which you have identified a potential ascending triangle. Prices should have entered the pattern in a bullish trend while the length and degree of gains prior to the entrance is not of concern here.
Next, establish a top horizontal resistance line with at least two swing highs coinciding with the horizontal line. The greater the number there are, the clearer this horizontal line becomes and so will the ascending triangle pattern be considered more reliable. These swing highs do not have to exactly meet the horizontal resistance, but should be seen to be around the zone.
Lastly, define the bottom rising trendline for your ascending triangle pattern, again with at least two swing lows coinciding with the rising trendline here. For ease of drawing these trendlines, one can use the 'point to point' tool on IG charts when you select from the dropdown menu using the drawing function.
Essentially, the ascending triangle is telling of the building up of bullish momentum for the continuation of an ongoing uptrend. With prices reflecting the demand in the market, the ascending triangle pattern had reflected the multiple attempts by the market at breaking above the horizontal resistance level. These attempts get more aggressive with the development of the ascending triangle pattern seeing the shorter candles over time. Eventually, the market will be looking for a breakout for a continuation of the uptrend. This breakout is oftentimes accompanied by high volume as well to affirm the on-going trend.
In the example below, the US dollar basket on IG had shown a breakout on the upside. Note that prices do not have to reach the apex of the triangle before a breakout occurs.
How to trade ascending triangle
The ascending triangle may be regarded as a fan favourite amongst many technical traders out in the market. This is not only due to the simplicity, but the ease in assisting the setup of a trade. As with every trade, entry, exit and stop loss should be established at the start of the trade.
As shown in the first picture above, a minimum price objective can be established from the breakout level by studying the magnitude of the base of the triangle. This price target can be used as the minimum level established for an exit from the trade. The entry point will evidently be the breakout level which one can use a buy order to enter the trade. As for the stop loss, one may shift it along the bottom rising trendline least prices should break out on the downside due to any news averse for the uptrend. Some leeway on the bottom would be recommended amid the imperfect pattern in practice.
Limitations of trading the ascending triangle
Perhaps already illustrated, the ascending triangle is rarely perfect in practice and would come with a lot of approximation particularly around the resistance levels both at the top and bottom. It will take one’s judgment and studying of the broader trend to decide if the ascending triangle pattern will likely be a reliable one. Even so, false breakouts are commonplace for triangle patterns, whether ascending, descending or symmetrical patterns. This is also the reason for stop loss to come in to prevent misrecognition of the trend and slippage due to sudden events.
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