The Ascending Triangle

The Ascending Triangle is a technical analysis chart continuation pattern that consists
of 2 trend lines. One being a horizontal trend line at a level of resistance, which is
classified as no fewer than two highs, and with the second being a trend line to the
upside on the lower side of the pattern, which connects a series of higher lows.

Formation: The ascending triangle begins to form when the price action takes an
orderly decline, forming a higher low. The price then rallies to the prior high and hits
resistance. A second pullback then occurs and the stock forms another higher low. This
same process happens over and over until a series of equal highs and higher lows are
formed.

Tip for Trading: Technical analysts are aware and understand that ascending triangles
can be much stronger of a pattern when the initial high that starts the pattern is at an all
time or (52 week) high. Most traders will typically open long positions when price action
breaks above the upper resistance line.

Identifying an Ascending Triangle

Trend Established: As with any other continuation pattern there must be an
established trend to continue. Within a downtrend or uptrend, ascending triangles are
formed after a short term established uptrend, which creates the ascending support line.
I once read that up to 75% of all ascending triangles breakout in the direction of the
overall trend, which leaves only roughly 25% that could be potential reversals. Further
investigation with the RSI, MACD, Moving Averages, and other indicators can be
conducted to determine the potential for continuation or reversal. An example will be
shown in this article using $DAL below.
 

Equal Highs: Once a trend has been established and the price has created equal
highs, you can identify the location of the overhead resistance line. At least 2 equal
highs should be present for reference points in order for a trend line to be formed.

Higher Lows: Once 2 equal highs and a resistance trend line can be identified, there
should be pullback points, where the price bounces off of the resistance line and
retraces to a lower level. If these pullbacks create higher lows, a new support trend line
can be established to give the ascending triangle it’s shape.
Volume: As the price range narrows, the volume typically decreases.

Support Line: The trend line supporting higher lows

Resistance Line: The trend line resisting equal highs

Ascending Triangle Breakout

The breakout is the confirmation that price action will continue to the upside or
downside based on it’s break of the support or resistance trend line. The price still
needs to close for that time frame for confirmation of the break. A serge in volume is
further confirmation of the break. You may also see the price retest the original support
line, as with the example shown below on $DAL.
Breakout Confirmation: An important strategy to note, is to only buy (or short) the
breakout if it breaks in the same direction as the overall trend. Again, the ascending
triangle is typically a continuation pattern. A breakout to the downside in an ascending
triangle that is within an overall uptrend could very easily result in a rectangle/sideways
price action with the trader being caught on the wrong side of the trade.

Executing the Trade

Entry Signal: A trade entry signal is given when the price breaks out of the ascending
triangle, again in the direction of the overall trend. Any break before the 66% mark of
the pattern is most likely a false break. Should the price break occur near the end (or
apex) of the triangle, it is considered to to be an invalid entry signal, as near-apex
breakouts typically lack momentum and have a higher probability to reverse.

Projected Price Target: The projected price target of an ascending triangle can be

estimated by taking the widest part of the triangle and adding it to the point of the
breakout.
 Stats
Probability of upside exit = 70%
Average rise in price on upside exit = 35%
Probability of downside exit = 30%
Average decline in price on downside exit = 19%
Probability of reaching price target = 75%
Probability of false breakout = 25%
Touches – Price must touch each trend line twice in order for pattern to be valid.