In our previous articles on chart patterns, we covered the Head and Shoulders pattern, the flags pattern (bullish and bearish flags). In this article, we explain the ascending and descending triangle chart patterns. These patterns work on the basis of breakouts. A break out is defined as price trading in a range and consolidating. When enough momentum is built, price tends to break out or break down with force.
Break out trading is one of the many ways to trade although traders tend to get caught more than often. One of the most typical price action with trading break outs is that price often makes false moves before carrying on in the intended direction. When such a move occurs, most of the traders who went in early often get stopped out. While one might argue to wait for a break out to be confirmed, it has its own drawbacks. Some times price tends to rally without testing the support. Such a move would often sour a trader for missing out on a great trading opportunity. On the same note, some break outs tend to fall back to support or resistance but instead of moving in the intended direction, the price tends to invalidate the break out set up.
Ascending and descending triangles point to both continuation and reversal patterns depending where they occur within a trend and therefore should be viewed within the larger perspective of price rather than treating them individually.
So how does a trader go about trading such triangle patterns?
Ascending and Descending Triangle Patterns
The triangle chart patterns are part of what is called a ‘measured move‘. To determine the target levels, the lowest (or highest), which is the starting point of the triangle is measured to the support or resistance level. The same distance is then projected upwards from the support or resistance level. Stops are usually placed near the most immediate low or high (but it often tends to be taken out before price moves in the expected direction).
An ascending triangle is defined as price forming a horizontal resistance (almost horizontal) followed by making higher highs while hitting the same resistance level constantly.
Similarly, a descending triangle is defined as price forming a horizontal support level as price tends to make lower highs while bouncing off the same support level at regular intervals.
Validating ascending and descending triangles
Now that we have an idea of what an ascending and descending triangle looks like, let’s go about setting some rules in order to pick the most probable triangle patterns.
Use a Line chart: A line chart as you might probably know tracks only the closing prices. It is devoid of any spikes (wicks) and thus represents a more smoother price. Using a line chart for plotting ascending and descending triangles gives a better picture and removes any confusion of where to plot the horizontal support or resistance lines as well as the trend lines.
Look to peaks and troughs: An ascending (or descending) triangle tends to carry more weight when it occurs either at the bottom or at the top of the trend indicating reversal. A simple way to identify this is to look for ascending triangles when price has been moving from top left to bottom on your chart or look for descending triangles when price moves from bottom left to the top of your chart.
Support/Resistance Levels: There is no need to look for absolute perfection when plotting the horizontal support or resistance lines. Most of the times, price tends to slip away above or below the horizontal line which can be ignored. Only point to bear in mind is that the support or resistance level you choose must be valid and have a few contact points and reactions (price bouncing off the horizontal level for example).
While chart patterns are easier to explain in hindsight, how does one go about taking on a trade as price action unfolds? One way to trade them would be to wait for a full candle to open and close outside the horizontal line. This includes making a high or a low completely outside the horizontal line. The only problem with this approach is that it reduces the profit ratio, but it comes at a more validated break out level.
Another way would be to wait for a pullback after the break out. While this might seem the safest, the risk here comes in the fact that at times price tends to leave the break out level very quickly and usually hits the price objective without any pullbacks. This can frustrate the trader as they wait on the sidelines expecting price to pullback but to no avail.
Why trade Ascending & Descending Triangle Patterns
- Works on any time frame and any instrument
- Price action based trading with support/resistance levels being the key point of focus
- Doesn’t need any indicators to trade
- Can be used alongside other indicators for validation of trades if need be
- At times, risk/reward ratio might not be good enough to enter a trade
- Conflicting patterns on higher and lower time frames can end up confusing the trader
- Stop levels need to be placed correctly as the most obvious levels tend to be taken out prior to the move