How The Ascending Triangle Pattern Can Be The Key To Unlock Profits…
In a previous article, we broadly discussed triangle patterns — what they are and how traders use them. Today, we’re going to focus more specifically on the ascending triangle.
As we mentioned earlier, triangles chart patterns are a continuation pattern of a previous trend. When a stock forms an ascending triangle, it will usually continue trending (higher lows) after the brief consolidation is completed.
Let’s dive in and learn more. By the end, you should have a grasp of how even novice traders can use this simple pattern to profit.
What Is The Ascending Triangle?
The ascending triangle is marked by two significant technical features. At its top, there is a line of resistance. This is a supply line or a price at which sellers step into the market and unload their shares. The second aspect of the ascending triangle is the rising trendline, which communicates the fact that bullish investors are willing to pay higher and higher prices over time.
Eventually, either the bulls or bears must triumph. The more times a stock or index tests its upper resistance line, the more likely it will eventually break out to the upside (because the supply held by sellers is consumed over time). If a stock tests resistance in an ascending triangle three or four times, then it is likely that the fifth try will be successful.
The example below shows the ascending triangle forming with Amazon (Nasdaq: AMZN) between early 2020 and mid-2020.
The stock made higher lows, making an upward trendline (green) that intersects with the horizontal resistance line (red). The lines should form a triangle shape, with the horizontal line acting as the upper boundary and the upward trendline as the lower boundary.
A breakout occurred in early June, which RSI confirmed, offering the chance for substantial profits.
How It Works
The ascending triangle is typically thought of as a consolidation or continuation pattern. That means that prices are likely to exit the pattern in the same direction they entered; therefore, a bullish breakout is likely. In assessing the ascending triangle, however, you should also check for confirmation indicators.
- When the breakout comes, look for stronger than normal volume. The higher the volume is in relation to normal volume, the more powerful the breakout could be — and the more trustworthy it is.
- Make sure the consolidation occurs above a rising 50-day or 200-day moving average. You may also want to confirm the pattern with the broader market direction.
- Look for oscillators like the Relative Strength Index (RSI) or Stochastics in bullish territory or showing positive divergence to support the potential breakout.
The measuring principle can be applied to the ascending triangle. To do so, simply take the height from the bottom of the triangle formation. Add that number to the breakout level, and you have the eventual target.
Why The Ascending Triangle Matters To Traders
Many technical analysis trading strategies require the trader to buy on the breakout. Recognizing the bullish bias of the ascending triangle gives traders a valuable head start, alerting them to a potential trading opportunity before the price action occurs. Therefore, spotting the ascending triangle is yet another tool traders can use to identify profitable opportunities.
Remember, though… You should never trade blindly based on one indicator or pattern alone. Smart, savvy traders should consider using a stop-loss order below the support level to limit potential losses if the breakout fails and the price reverses.
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