The art of technical analysis is not an easy one to master. There is an overwhelmingly high amount of different indicators, chart patterns, and strategies. A lot of people try to learn everything and eventually confuse themselves due to information overload. It’s important to keep your technical analysis simple. It’s even more important to understand why the technical analysis works and what exactly it is doing. You may know what a technical indicator is, but if you do not understand how and why it works, it is useless. I will discuss important aspects of technical analysis on this site as I see fit. The goal is not to know everything. The goal is to know the right things.
When it comes to chart patterns, there is one I use more than any other by a long shot. As you may have guessed from the title of this post, this chart pattern is called the Ascending Triangle pattern. I’ve seen a lot of different people create spinoffs of the ascending triangle, so it doesn’t really matter what you call it; just learn how to use it.
An ascending triangle has two main characteristics:
- Flat Line Resistance Level
- Ascending Support Level
Different traders will add variations to this. Some may look for a bullish lead in trend or a pullback from a recent run. I just look for the ascending triangle and analyze it from there.
Here is a visualization to help you better understand the pattern:
The pattern in itself is very simple so you will want it ingrained in your head. Keep in mind that the patterns will not always be picture perfect, so you need to really focus on the core characteristics of the pattern. Let’s break down the features and look at them from a psychological perspective.
1. Flat Line Resistance Level – This is the red line on the image above. This level, like any resistance level is a price level where the sellers overpower the buyers. Every time the stock reaches this level it comes back down. It may be a number where people just plan to sell, or it may be because people recognize that level as the highest level they can sell at and take advantage of that. The main point is that for the first few contacts with the resistance level, the sellers overpower the buyers. More people want to sell at this level and less people want to buy. Consequently, every time the price reaches this level, it goes back down because sellers take control of the market. Buyers push the price up. Sellers push it right back down. Focusing on the battle between buyers and sellers is very helpful when trying to understand the psychology behind why the ascending triangle pattern works. This brings us to the next characteristic of an ascending triangle pattern.
2. Ascending Support Level – The ascending support level is the defining characteristic of this pattern. Without it, the pattern does not exist. The ascending support level shows that the buyers are gaining more power. Every time the sellers try to drive the price back down, the buyers make a little bit of progress and create higher lows. Essentially, they won’t let the price drop down to where it did last time. They are willing to pay more for the shares than they were the last time the price got pushed down. The buyers are slowly becoming more powerful until the point where there is very little distance between the support and resistance levels. As the buyers increase their power, the sellers power remains stagnant. The same highs are reached consistently, and there are no lower highs. Picture an underdog sports team that is progressively improving while their main competitor neither improves nor worsens. Eventually the underdogs will catch up with the leaders. This is exactly what happens with the ascending triangle pattern. Eventually, the support level rises to the point where it meets the resistance level. This is where the breakout happens.
3. The Breakout – When the trend line of the ascending support level meets the resistance level, a breakout is likely. The stock has two options; it can either break the support level or the resistance level. Based on the lead in trend (ascending support), there is a good chance it will break the resistance level. Some traders will buy shares right before the break out in order to get a better price, while others will wait for confirmation above the trend line. There’s a trade-off between higher profitability and stronger certainty in the breakout. Personally, I decide my entries on a case-by-case basis and account for other factors before placing a trade.
Here is a visualization of what I just went over:
Important Things to Note
- It’s important to keep in mind that although we know a breakout is coming when the resistance is broken, we do not know how big the breakout will be. It could be a small 5% run, or it could be a 50% run. You will want to look at other factors such as the stock’s historical price movement, any new catalysts driving the breakout, etc.
- Ascending triangle patterns can be used on charts of any time frame. You can look for intraday breakouts, daily breakouts, or even weekly breakouts. Just make sure to plan your trade accordingly.
- These breakouts can and do fail. Sometimes the resistance is broken for a few minutes but the stock comes right back down. Make sure you know your risk and create an exit strategy.
- Analyze each ascending triangle pattern separately before making an entry. Incorporate your other trading strategies into this one. For example, you will want to make sure the stock has good volume, the chart is not overextended, etc.
- Ascending triangles will rarely look as nice as the ones above. Don’t focus on finding a “picture perfect” ascending triangle. Focus on understanding the psychology behind it. The buyers are slowly gaining power while the sellers power remains flat.
- Resistance levels and support trend lines will not always be perfect. Analyzing them is an art not a science.
- If you have a trading software that allows you to setup alerts, set an alert at or just before the resistance level so you can catch the breakout without watching the stock constantly
- See how a stock handles ascending triangles in the past to learn more about how it may handle a new pattern.