I have been receiving a lot of requests from my readers to share some more technical insights on my blog.
So here we are! In the following article, I am discussing a chart pattern which I often use while I carve out my trading strategies.
For those of you, who are not very familiar with ‘what are chart patterns’. Here is my take.
Chart Patterns are pictorial representation of demand and supply distribution in a stock over a period of time. Patterns on a chart reflect how demand and supply have changed sides over a period of time. Traders identify charts patterns so as to put themselves on sides where the forces are relatively strong.
So, if a pattern suggest that the supply is strong, traders position themselves on ‘sell’ side of trade. Similarly, if a pattern spotted on charts indicates that demand is building up, traders position themselves on ‘buy’ side of the trade.
There are plethora of patterns in Technical Analysis, not all equally effective though. Here I am discussing a chart pattern which is a setup in itself- The Ascending Triangle Pattern.
Among-st all the the chart patterns, I personally find Ascending Triangles as one of the most effective patterns. Wheneever i spot this pattern on charts, I use it as one of my important technical setup (Check this link where I used this pattern to harness a return of 4% in a just 2 days!)
Coming back to the point, Ascending Triangle is a pattern which is generally formed in up trending stocks as a continuation pattern (Though, it is not a rarity to spot them on downtrend stocks).
It appears as a triangle on charts where the lower base of the triangle is formed by a rising line connecting the reaction lows. The upper part of the triangle is formed by a horizontal line joining the almost equal reaction highs of the price action. It indicates continuation of the prior trend in motion.The immediate thought action for a trader is to take action on breakout.
This is how a typical Ascending Triangle looks like on charts.
Points A,C, E are the reaction highs and these are joined to form the horizontal line of the pattern. This horizontal line also act as resistance of the pattern
Points B, D, F are the reaction lows of the pattern and these are joined to form the ascending line of the pattern
Pre-Requisites of the pattern
Before trying to spot Ascending triangle on charts, it shall be borne into mind that not all ascending triangle seen on charts hold the same significance.
Now, this is something I wanted to mention, because this is one of the most common mistakes in identifying chart patterns. I see many students of mine who as soon as they know how a pattern looks like, would see the patterns in most of the charts.
Now, there is a catch!
Not all ascending Triangle pattern spotted on charts are valid. By valid I mean, that it can not be traded in a way ascending triangles are meant to be traded.
So, before we dwell much deeper, I am pointing out the criteria that differentiate between a valid and a non valid chart pattern.
- Ascending Triangle patterns are valid only if they appear in stocks with identifiable trend. The stock should be in an intact uptrend. If you see the pattern in a stock with no recognizable prior trend, then the validity of the pattern become questionable.
- The second prerequisite to ascertain validity of an Ascending Triangle is to have at least 2 reaction highs on the top of the horizontal line. Similarly, on the downside of the pattern, the ascending positive line should also have at least two reaction highs. If you are seeing an ascending triangle with wherein there are only 3 or lesser points, then its time to re-check.
- Time of the pattern formation- now this is again a very very common mistakes among traders. The pattern takes at least 1 month to form. and if you see an ascending triangle in charts which is formed in a matter of 1-3 weeks then, that is certainly not a traceable pattern.
Sentiment behind the Pattern
Ascending Triangle Pattern indicates sustained bullish momentum in an up trending stock. It indicates a scenario where the demand has dipped for a while. The triangle formed during the demand dip is nothing but a period of consolidation. Traders must look for a decisive break of the resistance or the horizontal line of the pattern. The breakout of the pattern indicates that there is thrust of new buyers in the counter and they are ready to buy the stock, in question at a higher price.
Strong volumes at breakout further confirm the validity of the pattern.
How to Create a Trading Strategy with Ascending Triangle?
Now, here is the crux of studying the pattern, we as traders have to carve out a strategy which make us real money. In this case of ascending triangle, the action taken by traders when an Ascending triangle is spotted on charts is to be on BUY side of the trade.
Entry/ Buy point–
The buy action is initiated when the stock gives a convincing breakout from the charts. when I say convincing, it means the traders should make sure that the breakout is sustainable for at least 1-2 sessions.
The target is calculated by the height of the pattern.
The stop is generally placed at the base of the pattern, however while placing stop loss at the base traders must take into account the absolute risk they are taking. Sometimes the base and the breakout point ( where entry is being taken into the stock) are at a relative much higher distance. Traders must calculate the risk:reward before initiating trades based on this pattern.
I, myself use this pattern very regularly in my trading and can vouch, it can be THE technical parameter in your trading system.
If you have any questions, please drop it in the ‘comment’ section below. Do not forget to share this article with your friends.
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