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 may occur 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 build once a short term established uptrend. This 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. Here is an example using $DAL:
Equal Highs: A trendline is established when the price has created equal highs. You can identify the location of the overhead resistance line based on those highs. At least 2 equal highs should be present for reference points in order for a trend line to be formed.
Higher Lows: There will be pullback points to create the uptrend with higher lows. This is where the price bounces off of the resistance line and retraces to a lower level. When pullbacks create higher lows, a new support trend line is established. This gives 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. Overall, the ascending triangle is typically a continuation pattern. A breakout to the downside in an ascending triangle that is within an overall uptrend could easily result in a rectangle/sideways price action. This catches some traders on the wrong side of the trade.
Executing the Trade
Entry Signal: A trade entry signal is when the price breaks out of the ascending triangle in the direction of the overall trend. Any break before the 66% mark of the pattern is most likely a false break. Near-apex breakouts typically lack momentum and have a higher probability to reverse.
Projected Price Target: You can estimate a price target of an ascending triangle by taking the widest part of the triangle and adding it to the point of the breakout.