What is an ascending triangle pattern and how to trade it?
Market analysts rely on many technical indicators to anticipate future trends, one of which is the very-popular ascending triangle chart pattern.
What is an ascending triangle pattern?
As the name indicates, an ascending triangle on a chart forms when the price consolidates between a rising trendline support and a horizontal trendline resistance.
The pattern typically appears during persistent uptrends or downtrends. Most technical analysts see it as a "continuation pattern," meaning the general market trend is likely to resume.
For example, the Bitcoin (BTC) price chart above shows the BTC/USD trading pair form an ascending triangle pattern between April 2020 and July 2020.
BTC price breaks out of the triangle range in late July to the upside, returns to retest the pattern's resistance trendline as support in September for further bullish confirmation, resuming its uptrend.
However, the ascending triangle is not always a bellwether for bullish continuation, particularly in bear markets. For instance, its occurrence during the 2018 bear markepreceded more downside, as shown in the Ether (ETH) price chart below.
The are also instances when ascending triangles have signaled the end of bear markets. One is Ethereum's triangle formation between March 2020 and April 2020, which led to a trend reversal to the upside, as shown below.
So, given these variations in outcome, how do traders use this chart pattern to help reduce risk and better prepare for the next move? Let's take a closer look.
How to trade an ascending triangle pattern?
The ascending triangle has a widely-tracked measuring technique that could help traders identify their profit targets following a breakout or breakdown.
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The target in a bull trend is measured by taking the maximum distance between the triangle's upper and lower trendline, then adding the distance to the upper trendline. The same applies to ascending triangle reversal setups.
Conversely, the profit target in a bear trend is obtained by measuring the distance between the triangle's upper and lower trendline. Then, add the outcome to the breakdown point on the lower trendline.
Beware of fakeouts
Ascending triangles have a 72.77% success rate of meeting their profit targets — meaning fakeouts are certainly possible.
Some clues can be obtained by checking the accompanying trading volume. An uptick is typically seen as a sign of strength. Conversely, a flat volume trend hints that the breakout or the breakdown may not have enough momentum.
Using stop-losses on the opposite side of the trend is also another tool traders can use to reduce risk in a potential ascending triangle breakout or breakdown scenario. In other words, traders can exit their positions at a smaller loss should the trend reverse prior to reaching its technical profit target.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
This post first appeared on: Cointelegraph