Introduction to the Stock Market_12. Chart patterns_ Ascending triangles trading strategy

Lesson 12: Chart patterns. Ascending triangles trading
strategy

We’ve learned how to identify ascending triangles, and how to break them down.
We’ll see now how to trade them.

The entry point is going to be the highest point of that formation.
Where we’ve drawn the pattern, we have a couple of swing highs. The highest of
them in that area is going to be the entry point. The stop loss is going to be the latest
swing low.

Remember, these patterns are a bit spiky, they fail sometimes, as they all do, but
ascending triangles are a very good indication of the near-term trend of a market.

Detailed strategy

Triangles are valuable patterns for any form of trend trading. That means trading
continuation of a strong trend. You can also use the appearance of a triangle and
triangle groups to either increase or reduce your position.

When trading an upward trend, you can add to your long position on the appearance
of a strong ascending triangle. Likewise, you can add to your short position when
a descending triangle appears in a downtrend.

The basic trade strategy is:
▪ Buy on ascending triangle
▪ Sell on descending triangle

Remember the depth of the triangle is the range of the market’s price during the time
the pattern was forming. The depth is a useful measure of volatility because it’s not
averaged and is recent. You can use this as a rule of thumb for setting your take
profit and stop losses for your trade. You can trade triangle events as single order
trades or as a grid.

For the stop loss, it’s a good idea to have a margin at least below the bottom range
of the triangle. The take profit should be a similar size.

AUD/USD example

Let’s say a triangle on AUD/USD has depth of 90 pips. The trade would then be:

This gives a 90 pip-leeway above and below the open level. You can set this to be
more or less aggressive, according to your risk levels.

Using triangles to forecast a trend change

You can also use triangle formations as an early predictor of trend change or trend
weakening.

Here you can see a sequence of triangles that tell the story of a changing trend. The
first pattern is a steep descending triangle. This is followed by a large symmetrical
triangle as the trend bottom nears.

Notice that the depth of the symmetric triangle is much greater than the two either
side of it. This is common because volatility usually widens as the market
approaches a trend bottom or trend top.
At the time the symmetrical triangle appears, the long moving average line is still
pointing towards continuation of the downward trend, though with some slowing.

Finally a new ascending triangle appears in the direction of the upward move. This
confirms that the trend has undeniably reversed. This would be the least risky time to
go long.

How to tell a reversal triangle from continuation triangle

The most common case is for an ascending triangle to appear in uptrend and a
descending triangle to appear in a downtrend. But this rule doesn’t always hold.
Triangles can also appear the other way around. These are atypical or reverse
cases.

The atypical case: An atypical triangle is in reverse, meaning a descending triangle
in an uptrend or an ascending triangle in a downtrend. Atypical triangles mark places
where the price attempted a reversal but failed to carry through.

You can use atypical cases to predict reversals in trend.

Symmetrical formations signaling trend tops/bottoms

A symmetrical triangle marks a consolidation period where the market isn’t driving in
any preferred direction. The bulls and bears are evenly matched. Data shows these
chart patterns to have slightly better than even odds at predicting a continuation.

They often form near or exactly at a trend top or trend bottom. This is why it’s
important to take note of them when they appear. Unlike averaging filters, a triangle
pattern can capture a great deal of information on the state of the market during that
interval.

The symmetric triangle formation can be a sign of a couple of things:

1. The market has reached the volatile period at the top/bottom of the trend
2. The trend is weakening and is pending a reversal – at that instant bulls can’t
push higher and bears can’t push lower.

3. The trend is consolidating but there could be a brief leg in the opposite
direction

A symmetric triangle on its own isn’t a reversal signal. However if you see one in a
trending market, look to see if the trend is already over extended. Look for signs that
the market is overbought/oversold, including:

▪ Approaching key support or resistances
▪ Overbought or oversold state in one or more oscillators
▪ Look for an extended leg without any correction

If a strong symmetric triangle appears in an uptrend, it’s best to reduce long
positions. Likewise in a downtrend it’s best to reduce short positions.
That is, treat the symmetric triangle as a potential for the trend to reverse.

Reversal of downtrend

Here we have an ascending triangle appearing in a downtrend. It’s an atypical
case being the wrong way around. This is followed by a strong descending triangle
and then a symmetric one as the trend bottoms out.

The first ascending triangle represents a failed upward breakout. The trend didn’t
reverse at this point and turns downwards again for a short period. However the
break shows that bullish strength is building at this point.

The symmetric triangle shortly afterwards means that the trend has probably
bottomed out and this would be a good point to go long.

It’s best not to enter on a single “reversal triangle”. It’s better to wait for other
confirming signals that the trend is indeed flipping direction. In this example it was
the symmetric triangle and the market already being in a deeply oversold state.

Reversal of uptrend

In this example a reversal triangle hints at the end of an uptrend. It shows a similar
development to the case above. The descending pattern forms as an uptrend is
nearing exhaustion.

Again this atypical triangle is a failed downside breakout attempt where bears are
gaining strength but not enough to control direction.

Shortly afterwards a big symmetric triangle forms on high volatility. This is a strong
clue that the current uptrend is nearing completion. A short position placed
immediately after the pattern would capture the large downside break just
afterwards.

This marks the end of this trading lessons series.

Remember to always practice what you’ve learned, and never invest more than you
can afford to lose. Trade well!