Ascending Triangle Pattern Strategy — What Is It? (Backtest And Example)
Last Updated on April 18, 2023
In technical analysis, chart patterns are price action structures that can give a clue about how the price may move next. There are different kinds of chart patterns, and one of them is the ascending triangle pattern.
The ascending triangle chart pattern is a triangle-shaped price structure in which the price swing highs end around the same level while the swing lows consecutively end higher, thereby giving the structure a horizontal top boundary and an ascending lower boundary. It is considered a continuation chart pattern, which means that when it forms, the price is likely to continue in the trend direction.
At the end of the article, we provide a backtest of the ascending triangle pattern strategy. Want to know more about this chart pattern? Read along!
What are ascending and descending triangle patterns?
The triangle pattern is a triangle-shaped price structure formed by a series of price swing highs and swing lows. There are three types of the pattern: ascending, descending, and symmetrical triangle patterns.
In the ascending triangle chart pattern type, the price swing highs end around the same level while the swing lows consecutively end higher, thereby giving the structure a horizontal top boundary and an ascending lower boundary. For the descending triangle pattern, on the other hand, there is a horizontal lower boundary (the swing lows end around the same level) and a descending upper boundary (the swing highs consecutively end lower).
These patterns are created with two trendlines. In the case of the ascending triangle, the upper trendline is flat along the top of the triangle and acts as a resistance level — a series of swing highs that ends around that level. The lower trendline is ascending as it is formed by a series of higher swing lows, so it gives a sort of ascending support level.
The opposite is the case for the descending triangle pattern — the upper trendline attached across a series of lower swing highs is descending, while the lower trendline attached across the swing lows is horizontal because the swing lows are around the same level.
The ascending and descending triangle patterns are both considered continuation patterns, as they signal price consolidations in a trend, as the price is expected to continue in the trend direction after they are formed. They are merely a pause in the trend when some of the major players are adding to their positions and others are taking partial profits.
Is an ascending triangle bullish or bearish?
As we stated earlier, triangles fall under the category of continuation patterns in technical analysis, whether it is the ascending triangle, the descending triangle, or the symmetrical triangle. After the price successfully breaks out of the consolidation, the trend (uptrend or downtrend) is expected to resume.
However, the configuration of the ascending triangle makes it seem to have a bullish tendency: it is formed by a series of higher lows, which implies that each time sellers attempt to push prices lower, they are increasingly less successful.
Moreover, as the price bounces back and forth between the upper and lower boundaries of the pattern, it meets resistance at about the same level where sellers come in to push the price down. But then, with each sell-off attempt, the price meets support at a higher level than the preceding one. In other words, the series of higher swing lows might be an indication of buyers’ determination to push the price higher, which might seem like bullish sentiment.
Despite the seemingly bullish structure of ascending triangle, the direction of the preceding trend supersedes it. When the pattern forms in an uptrend, the price is likely to break above the resistance level, and the uptrend would continue. In a downtrend, the price is likely to break below the support level to continue the downtrend.
How do you find the ascending triangle?
The ascending triangle pattern is easily identifiable if you know what to look for. It is shaped like a triangle, but you are the one to identify and trace the triangle shape. What you will see is a series of price swing highs that end around the same level, with each swing low ending a bit higher than the one preceding it.
When you identify such a pattern, you attach two trendlines to it — one across the swing highs and another across the swing lows — to delineate the triangle shape. Once you have done this, you will notice that the top trendline is horizontal, while the bottom one is ascending, which is where the name ascending triangle arises from.
The ascending triangle pattern is mostly seen in up-trending markets, where it signifies a consolidation in preparation for the continuation of the uptrend.
To identify the pattern in an uptrend, look for this kind of price movement: The price gets to a level and meets resistance, leading to a price drop. It then makes an attempt on the resistance level again but fails. The price drops again, but this time, it doesn’t fall as low as it fell before. If this continues, it forms a series of rising swing lows while the swing highs end at the resistance level.
The ascending pattern of the series of swing lows is in line with the bullish domination expected in an uptrend.
How do you trade the ascending triangle?
The best way to trade the ascending triangle pattern is to trade the breakout of the resistance level or the breakdown of the support level.
The former happens when the preceding trend is an uptrend, while the latter happens when the preceding trend is a downtrend. While breakout can happen in either direction, a breakout above the resistance level of the triangle is more likely in an uptrend, which requires taking a long position.
To trade the breakout of an ascending triangle in an uptrend, here are steps to follow:
- Identify the trend before the formation of the ascending triangle using a trendline or a moving average indicator.
- Use two short trendlines to mark the upper and lower boundaries of the ascending triangle — the horizontal upper boundary serves as resistance while the ascending lower boundary serves as a support.
- Watch out for a breakout above the upper: this is defined as a price close above the horizontal line that connects the highest swing highs in the pattern, and it must happen with a huge volume.
- Open a long position with a market buy order at the opening of the next price bar; alternatively, place a buy limit order just above the resistance level if the breakout price bar was too tall for your entry level — the price will likely retest the resistance level, which has now turned into a support level.
Ascending triangle vs. rising wedge
The ascending triangle looks a bit like the rising wedge, but both are never the same. In fact, the only things they have in common is that both can be seen in uptrends or downtrends and both have ascending lower boundary that is made of a series of higher swing lows. There are many differences, some of which we will enumerate below:
In an ascending triangle, the upper boundary is horizontal, while the lower boundary is ascending. On the other, in a rising wedge, both the upper and lower boundaries are rising, but the lower boundary has a sharper slope.
The swing highs that make up the upper boundary of the ascending triangle ends around the same level, but in a rising wedge, the swing highs that make up the upper boundary form a series of gradually rising higher swing highs.
The ascending triangle is considered a trend continuation pattern, regardless of the trend (uptrend or downtrend) where it forms. A rising wedge, on the other hand, can be a continuation or a reversal pattern, depending on the trend where it forms — if it forms in an uptrend, it is considered a reversal pattern, but if it forms as a corrective price rally in a downtrend, it is considered a trend continuation pattern.
What is an ascending triangle fake breakout?
Any consolidation pattern that can be traded with a breakout comes with the risk of false breakouts, and the ascending triangle is not an exception. An ascending triangle false breakout is when the price breaks out of the pattern and the subsequent price bars move back into the triangle, faking out traders who traded the breakout. This is a pretty common occurrence and may be a sign of smart money manipulating the market to bring in more market orders to fill their positions.
Here are a few tips that can help you avoid ascending triangle fake breakouts:
- Ignore any breakout that happens against the direction of the trend.
- Ensure that the breakout is a proper one and that it happens on a higher time frame (daily time frame): the price must close beyond the resistance or support levels as the case may be.
- Check the volume data to ensure that the breakout happens with a huge volume.
A fake breakout might be the footprint of smart money, so if you understand their game, it can give you a clue about where the real breakout would be. Most often than not, if the fake breakout occurs against the trend, there is a higher chance that the real breakout would be in the direction of the trend.
Ascending triangle trading strategy (backtest and example)
A backtest of an ascending triangle strategy requires strict trading rules and settings. Because it’s a complicated pattern to put down into 100% quantifiable rules, we rely on already published stuff.
Instead of a quantified backtest with defined trading rules, we rely on data from Thomas Bulkowski’s book from the late 90s called The Encyclopedia of Chart Patterns. His book is not based on strict quantified rules or data driven backtests, but rather on visual confirmation. Nevertheless, we believe his findings are a decent approximation of the usefulness of the ascending triangle.
Bulkowski, an engineer, sat down and went through technical formations for 500 stocks over a period of five years. This gave a total database of 2 500 years, although of course there are sources of error as all the stocks are from the same time period. In total, he registered over 15 000 technical formations.
Ascending triangle pattern strategy backtest
On pages 511-528 Bulkowski wrote about his findings. It’s pretty detailed, but we believe we can summarize the major findings into this simple table:
|Description||Ascending triangle breakout|
|#Formations among 500 stocks from 1991 to 1996||725|
|Reversal or consolidation||196 reversals, 529 consolidations|
|#False signals||230 (32%)|
|Average rise of successful formations||44%|
|Average decline of failed formations||21%|
|#Formations that reached the price target||439 (89)%|
|The average length of the formation||2 months (64 days)|
Ascending triangle pattern strategy – conclusion
Although we were not able to make a strict backtest with trading rules of the ascending triangle pattern strategy, we took good use of the research by Thomas Bulkowski.
Nevertheless, we recommend being cautious due to the lack of 100% quantified trading rules. Bulkowski’s research is based on after the fact analysis. As a matter of fact, you should be cautious about any technical analysis that is not based on 100% verifiable rules. There is a reason why the name of the website is Quantified Strategies! You can have a look at our good and profitable trading strategies, or you can find our absolute best strategies behind a paywall: