Chart Pattern Recognition Series - Ascending Triangles
Chart pattern trading is something that takes a lot of discipline. By this I mean stock charts cannot look "kinda" like a pattern or have certain elements of a pattern. They need to match the pattern's characteristics by 100% or they will not work. Think of it like you are taking a test and the only way to pass is to get exactly a 100%. Anything less and you could be setting yourself up for danger.
The Ascending Triangle chart pattern is one of the most easily identifiable patterns and also one of my favorites to trade upon a confirmed breakout. Correctly identifying this pattern has made me a lot of money in the past and continues to prove itself as one of most profitable trades. The pattern is a bullish pattern sporting a triangle shape with a horizontal top and upward sloping bottom.
The above is an example of what a real ascending triangle pattern looks like. What you should note is the following key characteristics:
1.) A horizontal trend line drawn across the minor highs.
2.) A upward sloping trend line connecting the minor lows.
3.) Volume diminishes the further along we get in the triangle. Heavy at the beginning of the triangle, lighter at the end.
4.) Price should cross the chart pattern (the triangle) several times. I usually like to see at a minimum two minor highs and two minor lows touched.
5.) Heavy volume on breakout - the day the price pierces the horizontal resistance line.
6.) Throwbacks are common after breakout. Look for the horizontal resistance line to become new support level before stock goes higher.
7.) Any breach of the upward slopping minor lows line could indicate a pullback and indicate the pattern has failed and to sell in order to limit your loses.
8.) Other indications of a busted pattern would be a less than 5% move after breakout before returning to the triangle top and shooting out the other side.
The pattern is has an average rise of about 35% in a bull market and 30% in a bear market. The average triangle length is about 2 months long although this is not an essential trait. The shape of the triangle itself will give you a clue as to how far the stock price will rise and what your target price should be. To calculate this price, simply compute the height of the triangle and add that to the horizontal minor tops line. This will give you the minimum predicted price.
Ok great! Now that we all have a basic idea of what the pattern looks like, can you give me an example of one that you found on your own? The one that I am watching right now is Mexico's iShares (EWW). Take a look at the chart pattern. It should look familiar to everyone now :-)