What is an Ascending Triangle
An ascending triangle is a bullish chart pattern used in technical analysis that is easily recognizable by the right triangle created by two trendlines. In an ascending triangle, one trend line is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trend line connects a series of increasing troughs. Traders enter into long positions when the price breaks out from the horizontal trendline.
The chart below is an example of an ascending triangle in the SPDR S&P 500 Oil & Gas Equipment ETF (XES) that occurred following a prolonged downtrend:
BREAKING DOWN Ascending Triangle
An ascending triangle is generally considered to be a continuation pattern, meaning that it is usually found amid a period of consolidation within an uptrend, but it may also occur as a reversal pattern following a prolonged downtrend. Once the breakout occurs, traders tend to aggressively buy the security and send the price higher on high volume.
The strength and reliability of an ascending triangle pattern depends on the actual pattern more than the prevailing trend. A minimum of two reaction highs and two reaction lows are required to form the ascending triangle pattern's trendlines. But, a greater number of trend line touches tends to produce more reliable trading results. The duration of the ascending triangle pattern can be a few weeks to a few months.
An ascending triangle is the bullish counterpart of a descending triangle.
Trading Ascending Triangles
The ascending triangle pattern represents a period of consolidation during an uptrend, so the volume tends to contract as the pattern develops over time. When the breakout occurs, traders usually look for a significant increase in volume as confirmation of a breakout. The absence of volume during a breakout could lead to a false breakout - or a bull trap.
An ascending triangle's price target is generally equal to the entry price plus the vertical height of the triangle. After the breakout occurs, the horizontal trendline turns into a key support level supporting a move higher. The price may move back to these levels before reaching the ascending triangle pattern's long-term price target.
A false breakout from an ascending triangle pattern occurs when the price moves significantly below the horizontal trendline after a breakout occurs and remains lower. In general, these false breakouts could lead to a reversal of the longer-term uptrend, especially if prices continue to move lower on high volume for several periods following the breakout.
Chart courtesy of StockCharts.com.