Ascending Triangle Pattern
The Ascending Triangle Pattern is considered as a bullish continuation pattern that many traders who rely on technical analysis look for and take trading signals from.
As the name suggests, the price action pattern is generally considered as a price action indicator of a continuing uptrend. However, it may sometimes serve as a market reversal signal.
This chart pattern is formed by a series of alternating swing highs and swing lows, where the swing highs all occur at approximately the same price level, while the swing lows are increasingly higher lows.
The ascending triangle is one of three triangle patterns recognized by technical analysts. The other two are the symmetrical triangle pattern and the descending triangle pattern. The best stock chart apps support a wide range of technical analysis features like charts, pattern recognition and drawing tools.
In this article, we explain the ascending triangle pattern. You learn how to spot it on a price chart and how to trade it. Discover the important factors that make the pattern a more reliable trading signal.
How to Identify an Ascending Triangle
An ascending triangle chart pattern forms when the price action of a stock or other traded security creates two trendlines, as follows:
- An identifiable line – that is approximately horizontal – that can be drawn across a series of swing highs that are at roughly the same price
- Below the horizontal resistance line, a rising or ascending trendline can be drawn across a series of swing lows in price that occur when price retraces downward from the horizontal resistance line; the key element of this series of lows is that each successive pullback from the price resistance level results in a higher low (that is, price doesn’t fall back as far as it did on the previous downside move)
There are several other elements that, when present, help to confirm the validity of the pattern and the trading signals that it provides.
- First, as the ascending triangle is a continuation pattern that is bullish, it should form in the course of an overall uptrend.
- Second, the horizontal line representing a price resistance level should be tested at least twice.
- Third, there should be at least two identifiable pullbacks in price from the resistance area that exhibit the requisite higher lows. More “higher low” pullbacks, which increasingly narrow the triangle, are considered as a stronger confirmation of the pattern.
- Fourth, there may be a decline in volume as the pattern is forming, but volume usually increases when there is a breakout of price above the resistance level.
The example image below should help to give you a clear idea of what this chart pattern looks like.
Understanding the Triangle Continuation Pattern
It helps to understand the market action that creates an ascending triangle and, thus, the theory behind trading strategies based on this chart formation.
An ascending triangle typically occurs when an overall uptrend encounters a significant level of price resistance that is, at least temporarily, strong enough to prevent the stock price from rising any higher.
Some investors holding long positions choose to take profits, and some short sellers enter the market, thinking that the uptrend may be ending or that there may at least be a substantial downside retracement of price.
What follows is a period of price consolidation near the resistance level. Each time price is pushed to the downside – enough buying demand enters the market to turn the price back to the upside.
Although buying pressure is not initially strong enough to overcome the resistance level, the fact that each successive move to the downside stops at a higher level is evidence that sellers have less and less ability to move price in their favor.
An upside breakout occurs when buying pressure increases and some short sellers abandon their positions as both sides see the triangle pattern as indicating that price is most likely to resume the existing uptrend.
How to Trade the Ascending Triangle Pattern
One reason technical traders keep an eye out for an ascending triangle chart pattern is that it provides clear, well-defined trading signals. It also represents an opportunity for buyers to enter the market or add to an existing buy position with limited risk. A technical trader familiar with the pattern can identify a market entry point and a profit target and have clear indications of where to place an initial stop-loss order.
A buy signal is generated when there is a breakout above the horizontal resistance line. Traders who buy in have a choice of where to place an initial stop-loss order:
- A bit below the previous price resistance level, which typically becomes an initial support level following an upside breakout
- A little below the most recent swing low
- A little below the lowest swing low of the pattern
- Below the low of the day
The triangle pattern also provides a potential profit target at whatever price level is the same distance above the previous resistance line as the distance between the resistance line and the lowest of the pattern’s swing lows. However, the price may continue advancing substantially higher. Traders looking to take profits may wait for signs of significant resistance forming or technical signals of a possible trend change.
Important Note: A downside breakout from the triangle pattern, with the price falling to a new low below the level of the lowest low in the triangle, invalidates the pattern as a signal of uptrend continuation and, instead, indicates a possible trend reversal to the downside. Short sellers may trade the trend reversal signal with an initial stop placed above the triangle high.
An Ascending Triangle Occurring in a Downtrend
The ascending triangle pattern may occasionally occur in an overall prevailing downtrend.
When it does, if the triangle pattern stays true to form, then an upside breakout above the triangle highs is generally considered an indication of a trend change from a downtrend to an uptrend. Traders may choose to buy in, placing an initial protective stop-loss at either the low of the triangle, the low of the day, or the low of the overall downtrend.
The Ascending Triangle – Summary and Closing Notes
The ascending triangle chart pattern is generally interpreted as a bullish continuation pattern when it forms in a controlling uptrend. Technical traders like the fact that the pattern provides clear trading signals, including market entry points that offer limited risk. On the other hand, day traders, swing traders, and long-term investors may all look to trade off this chart pattern when it occurs.
Of course, no chart pattern is 100% reliable, and the triangle pattern is no exception. As a result, a false breakout to the upside or downside of the pattern may occur. One clue to a breakout possibly being a false one is the breakout happening on noticeably low volume.
Note that most stock screeners can be set to identify ascending triangle patterns when they occur in the course of a stock’s price movement.
See Also: Stock Consolidation Meaning
Is the ascending triangle pattern bullish or bearish?
The ascending triangle is commonly interpreted as a bullish pattern, most often signaling the probable continuation of an existing uptrend. However, a downside breakout from the pattern is interpreted as a bearish signal of a possible trend reversal.
How do you trade an ascending triangle?
Trading strategies based on the ascending triangle pattern usually anticipate the resumption of an uptrend and look to buy into a breakout above the triangle’s horizontal line of resistance. A stop-loss can be placed below the low of the triangle formation. A possible profit target may be the price level identified at a height above the breakout line that’s equal to the height of the triangle formation.