31 Dec

The How-To Trading Strategy For Ascending Triangles

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One of my favorite chart patterns to keep an eye out for is the Descending Triangle.

It’s nailed some awesome momentum signals and it’s slowly becoming one of the regularly used trading tools in my toolbox.

A question I often get about it is:

What if the markets are heading higher instead of lower?

Well, there’s a pattern for that too!

And it’s the reverse of the Descending Triangle, known as the Ascending Triangle.  

Why do I like this pattern so much?

Because when other traders get stopped out, they help “push” the markets in your favor.

Essentially, you win from the losers.  The losing traders stop orders push the market in the direction of the trade.

Clearly, this is one powerful chart pattern if traded correctly.

Want to learn more?

 

What Is An Ascending Triangle Chart Pattern?

 

The Ascending Triangle is a bullish chart pattern that signals to traders that the market is going to continue higher.  

This chart pattern is visualized by a series of higher lows and equal highs that form a consolidation at the top of a price range.  

It looks like:

 

 

This is a sign of strength because:

  • Buyers are continuously buying higher prices
  • Lack of selling pressure
  • Stop orders are above resistance level

Let’s break this down piece by piece a bit more and I will explain what each of these mean.

 

Buyers are continuously buying higher prices

 

When looking to go long a stock it’s best to identify times when the buyers have full control. 

For example, if buyers are not willing to buy at higher prices, you would not see higher lowers forming into a resistance level.  

When you spot higher lows forming it shows that demand is growing each time as price continues upward.

 

 

As you can see in the image above, the SPY’s showed the bulls were in control by the series of higher lows progressing over the course of 4 months.

 

Lack Of Selling Pressure

 

If selling pressure was seen the chart pattern would look more like a descending triangle instead of ascending triangle.

 

 

In the image above, if there was strong selling pressure, the SPY’s would have experienced lower highs and equal to decreasing lows.  

Without the presence of higher lows, the bears are clearly in control and continue to push the price lower after the support line is breached.  

 

Stop orders are above resistance level

 

To add fuel to the fire…

Stop orders are usually placed on the opposite side of a breakout level.  In the case of the Ascending Triangle, it is the upper resistance line.

 

 

As the price continues to re-test the upper resistance line, the more traders will look to short the market.  

When an increased number of traders enter the market this in turn also increases the number of stop orders above the resistance line.

And when the market continues higher?

Well, that’s when the magic happens!

These buy stop orders are triggered fueling further buying pressure as the bulls control the momentum and the prices advance higher.

 

How To Enter A Trade Using The Ascending Triangle

 

There are 4 ways to trade the Ascending Triangle

  1. Stop orders at or above upper resistance level
  2. Close above upper resistance 
  3. Close above upper resistance and re-test trendline
  4. Buy the Ascending support level

Let’s take a look at each quickly…

 

Stop orders at or above upper resistance level

 

This entry condition is seen as the most aggressive momentum entry signal.

The breakout allows a trader to enter the position once the price trades above the resistance level of the ascending triangle. 

A trader would do this by placing buy stop orders at or above the upper resistance price.

Once price trades at or above the resistance price these orders will be triggered and you will be long the stock at the best price for a momentum trade.

 

 

Pros: One of the best ways to enter if the breakout is real.

Cons: If there is a false breakout you are stuck in the bull trap. 

 

Close Above Upper Resistance

 

This is similar to the prior approach.

The major difference is you are going to wait for the price to close higher than the resistance price before entering the trade long.

Here’s what I mean…

 

 

The bull trap was ignored since there are no buy stop orders sitting out in the markets to be triggered when the price trades higher than the resistance level.

By waiting for the price to close above resistance you are waiting for the bulls to claim control of the direction and complete the ascending triangle breakout.

Pros:  Reduces the likelihood of a false breakout.

Cons: If the momentum is strong, you will enter at a much worse price at the close.

 

Close Above and Re-Test Trendline

 

If you are a conservative trader and want to make sure you get the best price and the breakout is confirmed, you may want to wait for the re-test.

Let me explain…

When a stock breaks out of a pattern and has strong momentum there is little chance that it will ever come back to the breakout price (resistance level).

But what if the stock breaks out of a pattern and has weak momentum?

Well, that’s when the price will fall back towards the breakout price (resistance level) before heading higher. 

Here’s what I mean…

 

 

Pros: Reduces risk of price fading back below resistance from bull trap.

Cons: If momentum is strong, you will never enter the trade without chasing price higher.

 

Buy the Ascending support level

 

If you’re an advanced trader you might have already noticed something that can give you even better prices than the breakout traders.

For those who didn’t pick this up, it’s possible by buying the ascending support levels.

How?

By going long when the price re-tests the trendline of the Ascending Triangle.

For example:

 

 

Pros: Favorable risk-to-reward on your trade if the market continues higher after the breakout.

Cons:  The market might not break out.

This is one of the most ideal places for a trade to be entered but comes with additional risks that might not be obvious.

Here’s what I mean…

 

 

Conclusion

 

So here’s what was covered for the Ascending Triangle:

  • The Ascending Triangle is a power bullish chart pattern that takes advantage of the stop orders from losing short traders.
  • Don’t short the market if you spot an Ascending Triangle because the markets are likely to move higher
  • Time entries by using buy stop orders for the breakout trades
  • Can trade the Ascending Triangle using 4 simple strategies

 

Looking for more strategies like these…What are you waiting for?  

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