Chart Patterns
What is an Ascending Triangle?
An ascending triangle is a chart pattern frequently employed in technical analysis. This pattern materializes when price movements enable the creation of a horizontal line connecting swing highs and a rising trendline linking swing lows. The intersection of these two lines forms a triangular shape. Traders commonly monitor these patterns for potential breakouts, which can occur either to the upside or downside.
Ascending triangles are often referred to as continuation patterns since the price typically breaks out in the same direction as the preceding trend before the formation of the triangle.
An ascending triangle offers tradable opportunities, providing a clear entry point, profit target, and stop-loss level. It can be contrasted with a descending triangle.
What Does the Ascending Triangle Indicate?
An ascending triangle is generally considered a continuation pattern, signifying its significance when it emerges within an existing uptrend or downtrend.
Once a breakout from the triangle occurs, traders tend to take aggressive positions, buying or selling the asset depending on the direction of the breakout. Increased trading volume serves to confirm the breakout, indicating growing interest as the price exits the pattern.
To form the trendlines of an ascending triangle, a minimum of two swing highs and two swing lows are required. However, a greater number of trendline touches often result in more reliable trading outcomes. When the trendlines converge, and the price remains within the triangle for multiple swings, the price action becomes more coiled, leading to a potentially more robust breakout.
During trending phases, trading volume tends to be higher compared to consolidation periods. An ascending triangle falls under the consolidation category, and as such, volume tends to contract during its formation. Traders keep a watchful eye on volume, hoping for an increase during a breakout, as this confirms the likelihood of the price sustaining its breakout direction. Conversely, a breakout on low volume is a warning sign of a weak breakout, potentially resulting in a return to the pattern—a phenomenon known as a false breakout.
For trading purposes, an entry is typically executed when the breakout occurs. In the case of an upside breakout, traders opt to buy, while a downside breakout prompts selling or shorting. A stop-loss order is placed just beyond the opposite side of the pattern. For instance, in a long trade following an upside breakout, the stop-loss is positioned just below the lower trendline.
As for establishing a profit target, it can be estimated by considering the height of the triangle, added or subtracted from the breakout price. This calculation is based on the thickest part of the triangle. If the triangle’s height is $5, one would add $5 to the upside breakout point to determine the price target. If the price breaks lower, the profit target would be the breakout point minus $5.
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The Difference Between an Ascending Triangle and a Descending Triangle
These two types of triangles are both continuation patterns, except they have a different look. The descending triangle has a horizontal lower line, while the upper trendline is descending. This is the opposite of the ascending triangle, which has a rising lower trendline and a horizontal upper trendline.
Limitations of Trading the Ascending Triangle
The main problem with triangles, and chart patterns in general, is the potential for false breakouts. The price may move out of the pattern only to move back into it, or the price may even proceed to break out the other side. A pattern may need to be redrawn several times as the price edges past the trendlines but fails to generate any momentum in the breakout direction.
While ascending triangles provide a profit target, that target is just an estimate. The price may far exceed that target, or fail to reach it.
Psychology of the Ascending Triangle
Like other chart patterns, ascending triangles indicate the psychology of the market participants underlying the price action. In this case, buyers repeatedly drive the price higher until it reaches the horizontal line at the top of the ascending triangle. The horizontal line represents a level of resistance—the point where sellers step in to return the price to lower levels.
As the price drops downward from the horizontal resistance level, buyers begin to show their resolve, and the price fails to reach the recent low, with the trend turning upward once again at a higher swing low. In other words, the upward-sloping trendline that forms the lower boundary of the ascending triangle is acting as support—the level where buyers jump in and prevent the price from falling any lower.
In a well-defined ascending triangle pattern, the price bounces between the horizontal resistance line and the lower trendline. The lines of the triangle eventually converge, setting the stage for a showdown between upward and downward pressure that could determine which direction the price will move out of the pattern. As it approaches the vertex of the triangle, the price will either break out above the resistance level, suggesting additional gains ahead, or it will fall below the support level, increasing the likelihood that the price will decline.
What Is a Continuation Pattern?
When you identify a continuation pattern on a chart, it suggests that the price of the asset has a greater likelihood of emerging from the pattern in the same direction that it was moving previously. There are several continuation patterns, including the ascending triangle, that technical analysts use as signals that the existing price trend will likely continue. Other examples of continuation patterns include flags, pennants, and rectangles.
What Are Support and Resistance Levels?
Support and resistance levels represent points on a price chart where there is a likelihood of a letup or a reversal of the prevailing trend. Support occurs where a downtrend is expected to pause due to a concentration of demand, while resistance occurs where an uptrend is expected to pause due to a concentration of supply.1 In an ascending triangle pattern, the upward-sloping lower trendline indicates support, while the horizontal upper bound of the triangle represents resistance.
How Do You Trade the Ascending Triangle Chart Pattern?
Traders generally enter a position on a security when its price breaks above or below the boundaries of an ascending triangle. If the price jumps above the horizontal resistance level, it may be a good time to buy, while a move below the lower trendline suggests that selling or shorting the asset could be a profitable move. Traders often protect their positions by placing a stop loss outside the opposite side of the pattern. To determine a profit target, it can be useful to start at the breakout point and then add or subtract the height of the triangle at its thickest point.
The Bottom Line
An ascending triangle is a technical analysis chart pattern that occurs when the price of an asset fluctuates between a horizontal upper trendline and an upward-sloping lower trendline. Since the price has a tendency to break out in the same direction as the trend in place before the formation of the triangle, ascending triangles are often called continuation patterns. Traders often wait for the price to break above or below the pattern before entering a position. The ascending triangle pattern is particularly useful for traders because it suggests a clear entry point, profit target, and stop-loss level.
