Even strongest uptrends face a resistance they can’t break with the very first attempt. It happens that an asset is growing constantly but is getting stuck at some point, failing to proceed with the recent uptrend. As a logical consequence, a counter-trend action takes place as sellers start dominating in the markets, pushing the asset price lower during the technical retracement. During such periods most of the Forex traders wonder if the recent uptrend is already over and it’s time to take profits from previous long positions or is that counter-trend action just a correction with a chance to add volume to profitable trading positions?
This case is important for the overall technical analysis, especially in terms of determining further trend’s direction and maximizing profits from strong uptrends. At some point, it’s worth watching the market’s performance and assessing the momentum near strong resistance levels. In case if the rate is charting a sequence of equal highs and a sequence of higher lows, lowering the distance of every next pullback, then technical analysts talk about an Ascending Triangles on the price chart.
What is the Ascending Triangle Pattern?
Technically, the Ascending Triangle Pattern is a bullish continuation setup, which points to a strong resistance level and a high likelihood of the bullish breakout. When the bulls are losing momentum to keep pushing the asset price higher, the uptrend pace is getting exhausted. At the same time, the bears keep fighting for a certain defensive level of the price, representing a strong resistance. Once the sellers enter the market, while the bulls are comparatively weak, the price is getting vulnerable to a rebound. However, buyers are coming back at a certain level as the long-term uptrend remains in play, while the exchange rate is getting more attractive to renew long positions. Such a cycle repeats several times with the difference that the depth of the counter-trend rebounds is lowering with every correction.
The chart pattern reminds a triangle with the horizontal line representing the resistance level, while the support trendline, which connects all of the recent lows, is growing or ascending as the range of every next retracement is getting lower. Once such a chart setup is drawn, Forex traders suggest a bullish continuation of the recent uptrend, keeping in mind a possible breakout of the horizontal static resistance. What’s more, the ascending traingle setup allows traders to calculate the potential distance of the breakout and to set appropriate take-profit order to take advantage of the strong trend. So, how does the chart looks like?
Ascending Triangle Chart Pattern
The screenshot below shows the hourly chart of the U.S. dollar versus the Chinese Yuan. The prior uptrend struggled to continue after the first test of the horizontal resistance at 6.86264, charting a bearish retracement. USD/CNH had a consolidation price action with higher-lows sequence, which allowed traders drawing the ascending support trend line. After the second test of the same rate, the pair bounced back again but the depth of the last correction was lower than previous ones. The bullish breakout happened when the rate breached the previous resistance with the hourly close, signalling the bullish continuation of the uptrend.
Forex traders should keep in mind that the ascending triangle points to a bullish continuation only if the previous price action was bullish, meaning that the chart pattern plays out only after a prior uptrend. Sometimes it happens that an ascending formation is drawn on the chart after a downtrend, but that might or might not signal a reversal rather than a continuation.
Another feature of the triangle chart setup is that a crossover of the lines is not necessary as the breakout might happen much earlier than both lines of the triangle crossed each other. This is why the trading technique using triple triangles is more of a breakout strategy rather than the buy-dips approach. At the same time, both resistance and support lines have to be drawn precisely. The number of touchpoints has to exceed 2 on both sides of the triangle. The most effective ascending triangle chart pattern happens when rates test the upper line at least three times before the breakout, while the number of higher lows is equal or more than 3.
The breakout distance
It is also important to measure the depth of the very first rebound after the asset tested the horizontal resistance. That distance is called the base of the triangle and it is used to calculate the minimal leg of the bullish upswing after the resistance was breached. Thus, Forex traders can maximize their profits using the ascending triangle formation. Here is an example.
The blue ascending triangle on the four-hourly chart of USD/JPY was breached at 106.860. The base of the triangle (yellow) pointed to the deepest retracement counting close prices but not shadows. The same distance was added to the breakout level to calculate the take-profit order, which was set at 110.912. After reaching the workout level, USD/JPY triggered the take-profit order and reversed shortly, starting a new downtrend. This is why it’s extremely important to take profits in time but not hold positions for too long.
How to Use Ascending Triangle Chart Pattern
There are two possible ways of using ascending triangles depending on individual trading strategy and risk appetite. The more aggressive approach is based on the buy-dips trading strategy as traders could consider entering the market on a second or a third counter-trend action. The second option is more conservative in terms of waiting for the breakout confirmation before entering the market. Conditions for both cases are as follows.
Opening long positions on bearish rebounds
The main idea is that when an ascending triangle pattern is determined but not completed yet, Forex traders open long positions right after the second or third downside swing was charted. This method is riskier as triangles might have a preliminary and false nature. That’s why there is an additional requirement of a tighter stop-loss order with possible manual intervention to the trading process in case if something goes wrong.
The whole set of trading conditions is indicated below:
- Determine a consistent uptrend with higher highs and higher lows before the triangle setup is charted. In case of the triangle appeared after a rangebound action or downtrend, ignore the signal;
- Identify the triangle pattern, drawing a horizontal resistance and ascending support trendline with at least two touchpoints for each line;
- If the following downside swing has a higher low compared to previous candlesticks inside the triangle, open long positions;
- Set the stop-loss order 5-10 pips below the first red candlestick's low inside the triangle. This condition is needed in case if the triangle is false, and the sequence of higher lows is breached;
- When the close rate crosses above the horizontal resistance line, signalling the bullish breakout, shift the stop-loss order to the entry-level (non-loss mode). A more aggressive strategy suggests opening more longs after the breakout occurred;
- Set the take-profit order to the price level calculated by adding the breakthrough level to the distance of the first retracement (triangle’s base);
- There is also an option of using the trailing stop order with the distance of 10-20 pips counting from highs above the breakthrough level. The exact number of pips for the trailing stop depends on the currency pair’s volatility.
Setting buy-limit postponed orders on a bullish breakthrough
This method is more conservative and cautious than the previous one. The aim is to wait for the breakout confirmation, which should point to the completion of the triangle pattern. Sometimes it happens that the bulls are not able to breach the horizontal resistance due to several reasons, and the bears take the market under control, crashing the overall formation and breaking the sequence of higher lows. If the support trendline is breached by close prices, the triangle pattern might not work, and the trend would get a higher likelihood of the bearish reversal rather than a bullish continuation.
Here are the conditions to open long positions after the bullish breakout:
- Determine the ascending triangle pattern by drawing horizontal resistance and growing support trendlines;
- After the asset price charted a sequence of higher lows, testing the support line at least two times, set a buy-limit postponed order 5-10 pips above the horizontal resistance;
- Set if-done stop-loss order 5-10 pips below the recent low;
- Set if-done take-profit order according to the triangle’s workout distance as mentioned above;
- Once the bullish breakthrough triggered the postponed buy-limit order, and the close rate exceeded the previous high by 10-20 pips, shift the stop-loss order to the entry-level.
Both methods described above count on a bullish breakthrough of the triangle. The first one is risky as the breakout might not happen, while the second one is more cautious and thus less profitable. However, Forex traders can combine those methods, using them together depending on the price action. The only condition is to act following an individual trading strategy and money management rules. It would also be useful to control trading positions, closing them manually in case if the market conditions changed.
If you like this strategy, you might also be interested in this Personal Algorithmic Trading
Ascending Triangle Pattern - Examples of Profitable Trades
Buying EUR/USD on a second bearish rebound inside the triangle
The hourly chart of EUR/USD below shows an ascending triangle after the bullish action. Long positions were opened right after the pair charted the second bearish swing, while the sequence of higher lows was confirmed. The stop-loss order was set 10 pips below the recent lows, while the workout distance was equal to 40 pips above the horizontal static resistance, which was tested two times. After the bullish breakthrough confirmed the triangle pattern, the stop-loss was shifted to the entry point. The profit was taken after EUR/USD reached the workout level. Although further action was bearish, the ascending triangle pointed to the profitable chart setup with an accurate forecast of the uptrend continuation.False triangle
Although GBP/USD charted a pattern similar to the ascending triangle with an obvious horizontal resistance, traders had to ignore the chart setup and avoid opening long positions due to two reasons. First, there was no clear bullish action before the triangle was formed. Second, the sequence of higher lows was breached after the pair charted lower low compared to the initial bearish retracement from the horizontal resistance. Therefore, the pattern had to be ignored amid its false nature. Avoiding losses leads to the overall profitability at the end of the day so traders should know how to identify false chart patterns as well.
The Ascending Triangle Forex Trading System is based on a simple chart setup with a horizontal static resistance line coming together with a sequence of higher lows during retracements. This is a formation pointing to a bullish continuation after the breakout occurred. The technical analysis based on triangles allows traders not only to identify attractive entry points but also to calculate exact levels for take-profit orders. Although trading methods using ascending triangles might differ depending on the risk appetite, the main trigger to confirm further price action remains the same. If the bullish breakthrough of the resistance did not happen, or if the sequence of higher lows was destroyed, traders should close positions manually. At the same time, keeping stop-loss order tight allows traders to ignore false signals and avoid too many losses related to a sudden change of the market sentiment.