An ascending triangle chart pattern is commonly used in technical analysis chart reading created by the convergence of a rising trendline on swing lows and a horizontal line along swing highs. Both lines form an asymmetrical triangle. Traders are commonly looking for breakouts when they observe a triangle pattern.
Ascending triangles can help in estimating these breakout periods too. Hence, they are often referred to as continuation patterns as the price of the security will typically break out in the same direction as the trend which was in place just before the triangle formed. This ascending triangle is tradable because it provides a clear and swift entry point, stop loss level as well as a profit target.
There is also a descending triangle, which is another continuation pattern. The descending triangle visually differs from an ascending one such that the former has a rather horizontal lower trendline while its upper trendline is moving downwards. On the other hand, the opposite is true for the ascending triangle pattern. In this case, one can observe a rising lower trendline, converging to meet a rather horizontal upper trendline.
What to infer from an Ascending Triangle pattern?
An ascending triangle is usually considered a continuation pattern. This means that the pattern remains significant if it occurs within both a downtrend and an uptrend. Once breakout from the triangle occurs, traders are quick to aggressively sell or buy the assets depending upon the direction in which the share price first broke out. Growing volume helps to confirm whether or not the price has broken out. The more the volume increases the more interest in the price moves outside of the pattern.
To form as ascending triangle’s main trendlines, at least two swing lows and two swing highs are necessary. However, a greater number of trendlines converging to touch each other is indicative of more reliable trading results. Since both trendlines are converging into each other, if the share price keeps moving within this triangle for many swings, its price action will grow more coiled, eventually leading to a stronger breakout.
It is common for the share’s volume to be stronger during trend periods than consolidation ones. As an ascending triangle chart pattern is a kind of consolidation, the volume of shares tends to contract somewhat during this time. As mentioned earlier, traders seek out an increased share volume close to a potential breakout point. If the volume suddenly starts increasing, this helps to determine that the security is reaching a potential breakout point.
On the other hand, if the share’s price breaks out on a lower volume, this signals as a warning sign that the breakout will lack in strength. This indicates that the price could move back into the pattern, otherwise known as a ‘false breakout’. Hence, it is crucial that traders who are ascending triangle trading keep an eye out on the share volume when determining where the breakout point will be.
For the purpose of trading, an entry is usually considered when a share price breaks out. The unspoken rule among traders is that one should buy if the share’s breakout occurs on its upside, and sell/short their trades if the breakout occurs on the security’s downside. To aid in reducing one’s potential losses, a stop loss is placed right outside the ascending triangle chart pattern. For instance, suppose a trader takes a long trade on an upside breakout, she will place the stop loss just below the triangle’s lower trendline.
It is also quite easy to estimate a profit target from an ascending triangle pattern. This is usually done by subtracting or adding the height of this triangle – depending on its direction – from the breakout price. In other words, the ascending triangle pattern’s width is used. Let’s say the triangle has its broadest width at ₹50. This value will be added to the upside breakout point to get a proper estimate of the profit target. On the other hand, this same value is subtracted from the price if it breaks on the downside.
One limitation of this chart pattern – which is true for most technical indicators – is its potential for giving false breakouts. In some cases, the share price moves outside of the pattern and even proceeds to break out of the price only to re-enter it. In other cases, an ascending triangle pattern may be redrawn many times without generating any momentum as its price skirts past trend lines but does not break out at all. As mentioned before, share volume rising quickly is a good estimate of the breakout point approaching.