An ascending triangle pattern is one of the most popular stock chart formations employed by investors who follow technical analysis. Ascending triangle patterns offer the investor an additional edge to help beat the market. When used incorrectly, ascending triangles chart patterns can contribute to further losses. This article will help you get started in using ascending triangle patterns to help improve your investing results.
Description of Ascending Triangle Chart Patterns
The classic ascending triangle pattern used by technical analysts has a horizontal trend and another trend that slopes up, forming a triangle.
The horizontal trend forms when the price has rises to this level at least twice. The price does not have to actually touch the horizontal trend, though it should come close. This trading action comes from the behavior of sellers who overcome the buying volume, when the price reaches the horizontal trend. New buying steps in as the price retreats to push the price back up again. On each dip the buying overcomes the selling at a higher low, as interest in the stock grows. These higher lows form the rising trend.
The rising trend of the ascending triangle is defined by at least two price declines creating higher lows. While the price does not have to touch the rising trend, it should come close as this is an indication of the underlying buying strength of the stock price pattern.
Volume normally declines over the life of the ascending triangle chart as the selling pressure tends to diminish. This decrease in volume helps to open the door to the breakout. Breakouts take place when the price closes above the horizontal trend. Ideally, the breakout is accompanied by higher volume, though it is not required, as much of the selling pressure has been removed by the repeated moves up to the horizontal trend.
Breakouts on an ascending triangle pattern should take place more than half way through the formation of the triangle and before reaching the apex.
Often the price will re-test the horizontal trend, giving investors another opportunity to buy. In the example of an ascending triangle below, there were two re-tests that held.
Trading Ascending Triangle Chart Patterns
When the price pierces the horizontal resistance we have a breakout of the ascending triangle. In some cases we will see above average volume on the breakout as traders are buying. However, it is not necessary. If the volume is at or below average and the price breaks up, it is likely the selling pressure has diminished. This allows any buying to push up the price of the shares. This is one of the few situations when we can have a move up with below average volume.
Investors should look to buy on the initial break. However, you can also wait for the re-test as another re-entry point. Unfortunately, the re-test does not always take place, so you cannot count on it.
Many investors use the measured rule to estimate the gain they expect from trading the ascending triangle pattern. The measured rule calculates the difference of the low point of the ascending triangle chart and the horizontal trend. Then add this difference to the horizontal trend to calculate the exit target. In the sample chart above the low is approximately 32.80 and the horizontal trend is 36.20. The difference is 3.40 (36.20 - 32.80 = 3.40). Add this difference to the horizontal trend 36.20 and you get 39.60 as your target. (36.20 + 3.40 = 39.60). This target can be the first exit where many investors will sell half of their position to capture the profit and use the money to invest in other opportunities. The remaining half is covered by a trailing stop that is above the breakout and just below a support level, allowing them to capture any further move up.
Risks using Ascending Triangle Chart Patterns
The success of the ascending triangle stock chart pattern is closely aligned with buying on the up side breakout of the horizontal resistance. Investors who enter before the breakout assume higher risk primarily from a premature break either up or down.
Premature breakouts on an ascending triangle chart occur the price rises through resistance before the pattern has had a chance to develop. The price can break down through the rising trend ending the validity of the pattern before it develops. The ascending triangle chart is prone to these type of failures, which is why an investor should be sure the ascending triangle pattern fully develops before making a commitment.
Many investors and investing sites will classify a stock pattern as an ascending triangle, even though it fails to meet the specific guidelines. When this occurs, it is more likely the pattern will fail. It is tempting to call a pattern an ascending triangle even when it does not meet all the criteria. When investors take this action they are creating additional risk of a bad trade. There is enough risk when investing in the stock market. Why add to the risk with an improperly classified ascending triangle chart pattern.
To avoid these risks take the time to properly identify the ascending triangle stock chart. If the pattern fails to meet the criteria review other possibilities including an head and shoulder tops and rising channels.
While the ascending triangle is a popular stock chart pattern, it does not transpire that often. When you find an occurrence, you should follow it carefully as the pattern produces some of the best results.
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