It is defined by two lines:
- A horizontal resistance line running through peaks.
- An uptrend line drawn through the bottoms.
While two bottoms belonging to the same trendline would suffice for pattern recognition, it is more favorable when there are more.
As price rallies, it finds resistance and begins to erase some of its gains.
The subsequent fall in price is shorter than the previous fall and this manifests the series of higher lows.
If a line is drawn above and below the pattern, the top line will appear straight while the bottom will slope upwards at an angle.
The above image describes perfect conditions for the Ascending Triangle formation. However, it’s a rare occasion to find a perfect triangle, so in most, cases both the trend line and resistance line will be pierced by false breakouts. The resistance line can be also slightly inclined.
The higher lows indicate more buyers are gradually entering the market and buying pressure increases as price consolidates moving further towards the apex.
Price is consolidating with a bullish bias so traders should watch out for an impending breakout up through the resistance level.
If price can break through the resistance level, that level will now act as a support level.
Watch out for fakeouts (false breakouts) carefully as they might be easily confused with the true ones when, in fact, the price is going to retreat back into the triangle.
Continuation patterns also include symmetrical triangles, descending triangle, wedges, flags, rectangles, and pennants.
If formed in the downtrend, the ascending triangle is more likely to act as a reversal pattern.
Breakouts can also happen in both directions. Statistically, upward breakouts are more likely to occur, but downward ones seem to be more reliable.
The majority of breakouts of either direction are observed in the second half of the pattern formation distance.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.