HOW TO TRADE ASCENDING TRIANGLE CHART PATTERN

How to trade ascending triangle chart pattern
Infographic - How to trade ascending triangle chart pattern

Entry: after breaking the triangle's upper border at point (5), either with an entry after the breakout, or after a possible retest of the upper border.

Take profit: identified by measuring the vertical distance between the triangle's upper border and the first support (2), that measurement is then applied from the breakout rate (5)

Stop loss: can either be the triangle's upper border rate (5), or the last touch to the triangle's lower border before the breakout (4)

ASCENDING TRIANGLE PRICE ACTION

This chart pattern starts forming with bulls already in control of the exchange rate's uptrend. Bears make a stand at a certain rate and try holding it as much as they can, while bulls keep squeezing on that rate till they finally break it and the exchange rate continues its uptrend.

Let's break down the pattern formation!

In an uptrend, price action finds the first resistance (1), which will be the horizontal resistance for the rest of the pattern formation.

Price action reverses direction from the first resistance (1) and goes downwards till it finds the first support (2), which will be the lowest low in the pattern.

Price action reverses direction from the first support (2) and goes upwards, till it finds the second resistance (3), which will be around the rate of the first resistance (1)

Price action reverses direction from the second resistance (3) and goes downwards, till it finds the second support (4), which must be higher than the first support (2)

The pattern is completed when price action reverses direction from the second support (4) and goes upwards till it breaks the triangle's upper border at point (5)

NOTES ON ASCENDING TRIANGLE

Direction

Continuation

Type

Bullish

Occurrence

High

Common term

All

Before the breakout, 4 touches to the triangle's upper and lower borders are the minimum for a valid pattern, more touches are acceptable.

The breakout of the pattern is expected at around (half / two thirds) the triangle formation, measured from the first touch (1) to the intersection point of upper and lower borders.

The most common direction of the pattern is a continuation, but that doesn't rule out the existence of reversal ascending triangles. The target measurement in that case will be applied from the lower border's breakout rate.

Volume usually decreases as the pattern is being formed, and increases when breaking or retesting the triangle's upper border (5)

This pattern is commonly found on all time frames.

ASCENDING TRIANGLE REWARD:RISK

When using the triangle's upper border rate as stop loss, R:R will depend on the (breakout rate-entry rate) distance, compared to the target measurement (1-2) distance.

When using the last touch before the breakout (4) as stop loss, the pattern's R:R improves when that touch is near the end of the triangle, as well as when the lower border's up-slope is sharper.

Always remember that both stop loss levels explained above are absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of course, calculations for position size and R:R should be done with respect to those rates.

ASCENDING TRIANGLE REAL TRADE

Ascending triangle real trading example
Forex chart - Ascending triangle real trading example, as found on the H4 chart of AUD/USD using FXCM's MT4 platform

PRE-BREAKOUT CALCULATIONS

Since an ascending triangle chart pattern can be spotted after the reversal from point (4), you can save yourself precious time by doing the following set of calculations before the breakout, since they don't rely on the trade's entry rate.

Note: identification of the upper border rate is subjective since the rates of points (1) and (3) won't be exactly the same. We prefer choosing the point with the lower rate to keep the pattern compact, which in this trade is point (1)

  • Pattern length (upper border rate - point (2) rate)
    • (0.72418 - 0.69724) * 10000 = 269.4 pips
  • Take profit rate (upper border rate + pattern length)
    • 0.72418 + (269.4 / 10000) = 0.75112
  • Stop loss #1 rate (upper border rate - 20% of pattern length)
    • 0.72418 - ((20 * 269.4 / 100) / 10000) = 0.71879
  • Stop loss #2 rate (point (4) rate - 10% of pattern length)
    • 0.71082 - ((10 * 269.4 / 100) / 10000) = 0.70813

TRADE SETUP

Choosing when to enter the trade after the triangle's upper border breakout is always left to your best judgement. In this trade, we chose to enter the market at the closing rate of the candle that broke the triangle's upper border, which was a strong bullish candle that closed on a higher rate than that of the previous two resistances at points (1) and (3), suggesting a real breakout for the triangle's upper border.

  • Trade entry rate
    • At the closing rate of the candle that broke the triangle's upper border at point (5): 0.72751
  • Take profit in pips (take profit rate - entry rate)
    • (0.75112 - 0.72751) * 10000 = 236.1 pips
  • Stop loss #1 in pips (entry rate - stop loss #1 rate)
    • (0.72751 - 0.71879) * 10000 = 87.2 pips
  • Stop loss #1 R:R (take profit in pips / stop loss #1 in pips)
    • 236.1 / 87.2 = 2.708
  • Stop loss #2 in pips (entry rate - stop loss #2 rate)
    • (0.72751 - 0.70813) * 10000 = 193.8 pips
  • Stop loss #2 R:R (take profit in pips / stop loss #2 in pips)
    • 236.1 / 193.8 = 1.218

Currency pair

AUD/USD

Timeframe

H4

Breakout

02-Mar-2016

Platform

MT4

Broker

FXCM