Trading with patterns is an essential componentof technical analysis.
This means that you need to shift your focuson price action and what the pattern shows.
All markets, regardless of type, have onething in common.
That is, they all consolidate in ranges.
Therefore, one of the most common chart patternsare triangles.
The triangle pattern is a specific figureformed on the price chart, typically identified when the tops and the bottoms of the priceaction are moving toward each other like the sides of a triangle.
When the upper and the lower level of a triangleinteract, traders expect an eventual breakout from that area.
As such, many breakout traders use triangleformations for identifying breakout entry points.
There are different kinds of triangles thatcan be seen on a chart.
In this video we’ll take a closer look atthe ascending triangle pattern and the corresponding trade setups.
Once you are equipped with this knowledge, you should be able to add a triangle trading strategy to your trade setup arsenal.
The ascending triangle formation is a continuationpattern and as the name suggests it has the shape of a triangle.
The ascending triangle is also known as thebullish triangle because it leads to a bullish breakout.
This is how the ascending triangle looks like:The first element of this price pattern is an upward slope followed by a flat top.
This shows that the market has tried multipletimes to break the resistance top but it couldn’t.
Hence, we have developed a resistance line.
The second element of the ascending triangleis a rising trend line moving upwards.
This is what makes the pattern bullish.
Now, all continuation patterns need to havea context of a trend.
In the case of the bullish ascending triangle, we need to have a previous uptrend to support the breakout.
Now that you learned how the ascending formationlooks like i want to share with you several important things that I’ve learned fromtrading the bullish triangle.
First, on a price chart, the triangle patternwill rarely have a perfect shape.
Often times you’ll see an ascending wedgepattern which will break the resistance line but have no real momentum behind the breakout.
Other times, the pattern will develop spikybars that will lead to false breakouts.
There is no perfect pattern.
What's the first thing you see in this chart? That's right, the pattern is not perfect.
I remember how I would read a book on a specificchart pattern and then when i would go in the market, I could never find an exact match.
For example, in this chart, notice how thehighs are not aligned perfectly.
But, notice how the stock breaks through theuptrend line, only to go higher.
So don’t search only for perfect triangles.
Also, you really need to think in terms ofwhat it’s going on behind the scene.
You don’t just have to look at the price, but also try to read what the market participants are doing.
When the price is moving up, it starts todevelop the classical higher lows.
For whatever the reasons, the buyers may becomea little bit more aggressive with each new successive higher low.
Or, we can say that the sellers aren’t tooaggressive when the market turns down inside the ascending triangle chart pattern.
Whichever alternative you prefer, that iswhat it’s causing the triangle price formation to develop.
When we reach the climax point of the trianglewhere the price has nowhere to go, that’s the moment when you should anticipate a breakout.
The location of the pattern is also important! If the triangle pattern is inside of a bigtrading range, then the solid resistance level might not be that significant.
If you pay attention at this chart, you’llnotice the triangle pattern, but the problem is that it develops inside a big trading range, so even if there is a small breakout, the upward movement is restricted by this otherresistance.
However, if the ascending triangle price formationdevelops in the middle of a bullish trend that would add more weight to the pattern.
When the ascending triangle develops withina trend then we’re going to be interested in buying the breakout, like in this example.
Regardless of their location, during a trend, ascending triangles are bullish patterns that indicate accumulation.
The higher lows in the pattern are a cluethat buyers are not letting their position go at lower prices as the pattern makes higherlows.
Another important tip is that you need tohave a clear resistance level, with a series of highs occurring at or near the same price.
You don't want to have one or two peaks, becauseit might be a swing high or double top.
There needs to be a number of clear attemptsby the bulls that go nowhere with the price.
Once the triangle breakout happens you needto see a pick-up in volume that will result in a nice long trade.
The next thing you want to see in a breakoutis for volume to accelerate on the move higher.
This does not mean the volume on the breakouthas to be the highest over the last 24 hours or something.
It just means you need to see some accelerationto the upside.
The key point is you want to see buyers participatein the move to increase the likelihood of follow-through.
How do you trade an ascending triangle pattern? The classic method is to buy the breakoutonce you have had 3 or more touches with volume.
Now, you have a few choices of where to enter.
The first option is to buy on the highesthigh after three or more tops.
The potential issue with this approach isthat the price could fail and is still either developing the ascending triangle or you arecaught in a bull trap.
The main problem with triangles, and chartpatterns in general, is the potential for false breakouts.
The price may move out of the pattern onlyto move back into it, or the price may even proceed to break out the other side.
A pattern may need to be redrawn several timesas the price edges past the trend lines but fails to generate any momentum in the breakoutdirection.
What I prefer is to look at pivot points.
I like to wait for a key pivot point resistancelevel to be breached and then place a buy order slightly above this level.
The potential issue with this approach isyou are exposed to more risk as you are buying at higher levels with greater downside exposure.
But, this will eliminate a lot of false breakouts, which will occur a lot.
That’s why I like to add a safety net byusing pivot points.
So, if you pay attention at this example, we have the upper trend line, with higher lows, the clear resistance level, and thebreakout.
But, in real time, as we don’t know if thebreakout is real or not, we wait for the price to consolidate above this pivot level, asa confirmation of the breakout of the pattern.
Once the price consolidated above, we cansafely search for long entries.
Here are other examples of ascending trianglesbreakouts, with pivot points confirmation.
Another approach is to buy inside of the triangle.
Once you see the pattern setting up, you canwait for a touch of the uptrend line and then place a long entry.
The benefits with this approach are that youcan place a tighter stop since you are closer to the demand line (support), this also givesyou a potential profit before the actual breakout.
The downside to this approach is you couldwait a longer time for the move through the top of the triangle, in a possible consolidationphase.
This is a more advanced technique, and themost important thing is that you need to have a clear uptrend.
When you spot an ascending triangle on thechart, you should be prepared to catch a bullish price move equal to at least the size of thetriangle.
A profit target can be estimated based onthe height of the triangle added from the breakout price.
The white lines correspond to the size ofthe triangle and its potential target, which is typically a 1:1 measured move.
So, the profit target for the setup is thedistance of the triangle added to the top.
Regarding stops, there are multiple areaswhere you can place your stop orders.
First, you can place the stop order beneaththe uptrend line.
You can also use the low of the breakout candle.
If the price is able to break out, you canplace your stop below the low of the candlestick.
This way if the price reverses, you are notwaiting until the uptrend line is breached.
This way you can keep more of your gains.
Also, keep in mind, while ascending trianglesprovide a profit target, that target is just an estimate.
The price may far exceed that target, or failto reach it.
This is why, using proper risk-reward ratiosis mandatory.
Otherwise, the risk is that the triangle patternwill transform into something else and will invalidate the reason you have entered inthat particular trade in the first place.
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