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Trading With Ascending Triangles To Find Explosive Breakouts (Forex & Stock Trading Strategy) - YouTube
Channel: The Secret Mindset
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Trading with patterns is an essential component
of technical analysis.
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This means that you need to shift your focus
on price action and what the pattern shows.
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All markets, regardless of type, have one
thing in common.
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That is, they all consolidate in ranges.
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A lot.
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Therefore, one of the most common chart patterns
are triangles.
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The triangle pattern is a specific figure
formed on the price chart, typically identified
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when the tops and the bottoms of the price
action are moving toward each other like the
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sides of a triangle.
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When the upper and the lower level of a triangle
interact, traders expect an eventual breakout
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from that area.
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As such, many breakout traders use triangle
formations for identifying breakout entry
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points.
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There are different kinds of triangles that
can be seen on a chart.
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In this video we鈥檒l take a closer look at
the ascending triangle pattern and the corresponding
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trade setups.
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Once you are equipped with this knowledge,
you should be able to add a triangle trading
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strategy to your trade setup arsenal.
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The ascending triangle formation is a continuation
pattern and as the name suggests it has the
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shape of a triangle.
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The ascending triangle is also known as the
bullish triangle because it leads to a bullish
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breakout.
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This is how the ascending triangle looks like:
The first element of this price pattern is
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an upward slope followed by a flat top.
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This shows that the market has tried multiple
times to break the resistance top but it couldn鈥檛.
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Hence, we have developed a resistance line.
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The second element of the ascending triangle
is a rising trend line moving upwards.
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This is what makes the pattern bullish.
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Now, all continuation patterns need to have
a context of a trend.
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In the case of the bullish ascending triangle,
we need to have a previous uptrend to support
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the breakout.
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Now that you learned how the ascending formation
looks like i want to share with you several
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important things that I鈥檝e learned from
trading the bullish triangle.
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First, on a price chart, the triangle pattern
will rarely have a perfect shape.
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Often times you鈥檒l see an ascending wedge
pattern which will break the resistance line
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but have no real momentum behind the breakout.
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Other times, the pattern will develop spiky
bars that will lead to false breakouts.
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There is no perfect pattern.
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What's the first thing you see in this chart?
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That's right, the pattern is not perfect.
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I remember how I would read a book on a specific
chart pattern and then when i would go in
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the market, I could never find an exact match.
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For example, in this chart, notice how the
highs are not aligned perfectly.
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But, notice how the stock breaks through the
uptrend line, only to go higher.
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So don鈥檛 search only for perfect triangles.
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Also, you really need to think in terms of
what it鈥檚 going on behind the scene.
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You don鈥檛 just have to look at the price,
but also try to read what the market participants
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are doing.
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When the price is moving up, it starts to
develop the classical higher lows.
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For whatever the reasons, the buyers may become
a little bit more aggressive with each new
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successive higher low.
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Or, we can say that the sellers aren鈥檛 too
aggressive when the market turns down inside
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the ascending triangle chart pattern.
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Whichever alternative you prefer, that is
what it鈥檚 causing the triangle price formation
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to develop.
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When we reach the climax point of the triangle
where the price has nowhere to go, that鈥檚
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the moment when you should anticipate a breakout.
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The location of the pattern is also important!
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If the triangle pattern is inside of a big
trading range, then the solid resistance level
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might not be that significant.
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If you pay attention at this chart, you鈥檒l
notice the triangle pattern, but the problem
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is that it develops inside a big trading range,
so even if there is a small breakout, the
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upward movement is restricted by this other
resistance.
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However, if the ascending triangle price formation
develops in the middle of a bullish trend
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that would add more weight to the pattern.
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When the ascending triangle develops within
a trend then we鈥檙e going to be interested
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in buying the breakout, like in this example.
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Regardless of their location, during a trend,
ascending triangles are bullish patterns that
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indicate accumulation.
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The higher lows in the pattern are a clue
that buyers are not letting their position
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go at lower prices as the pattern makes higher
lows.
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Another important tip is that you need to
have a clear resistance level, with a series
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of highs occurring at or near the same price.
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You don't want to have one or two peaks, because
it might be a swing high or double top.
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There needs to be a number of clear attempts
by the bulls that go nowhere with the price.
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Once the triangle breakout happens you need
to see a pick-up in volume that will result
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in a nice long trade.
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The next thing you want to see in a breakout
is for volume to accelerate on the move higher.
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This does not mean the volume on the breakout
has to be the highest over the last 24 hours
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or something.
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It just means you need to see some acceleration
to the upside.
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The key point is you want to see buyers participate
in the move to increase the likelihood of
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follow-through.
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How do you trade an ascending triangle pattern?
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The classic method is to buy the breakout
once you have had 3 or more touches with volume.
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Now, you have a few choices of where to enter.
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The first option is to buy on the highest
high after three or more tops.
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The potential issue with this approach is
that the price could fail and is still either
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developing the ascending triangle or you are
caught in a bull trap.
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The main problem with triangles, and chart
patterns in general, is the potential for
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false breakouts.
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The price may move out of the pattern only
to move back into it, or the price may even
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proceed to break out the other side.
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A pattern may need to be redrawn several times
as the price edges past the trend lines but
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fails to generate any momentum in the breakout
direction.
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What I prefer is to look at pivot points.
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I like to wait for a key pivot point resistance
level to be breached and then place a buy
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order slightly above this level.
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The potential issue with this approach is
you are exposed to more risk as you are buying
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at higher levels with greater downside exposure.
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But, this will eliminate a lot of false breakouts,
which will occur a lot.
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That鈥檚 why I like to add a safety net by
using pivot points.
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So, if you pay attention at this example,
we have the upper trend line, with higher
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lows, the clear resistance level, and the
breakout.
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But, in real time, as we don鈥檛 know if the
breakout is real or not, we wait for the price
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to consolidate above this pivot level, as
a confirmation of the breakout of the pattern.
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Once the price consolidated above, we can
safely search for long entries.
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Here are other examples of ascending triangles
breakouts, with pivot points confirmation.
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Another approach is to buy inside of the triangle.
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Once you see the pattern setting up, you can
wait for a touch of the uptrend line and then
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place a long entry.
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The benefits with this approach are that you
can place a tighter stop since you are closer
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to the demand line (support), this also gives
you a potential profit before the actual breakout.
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The downside to this approach is you could
wait a longer time for the move through the
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top of the triangle, in a possible consolidation
phase.
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This is a more advanced technique, and the
most important thing is that you need to have
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a clear uptrend.
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When you spot an ascending triangle on the
chart, you should be prepared to catch a bullish
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price move equal to at least the size of the
triangle.
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A profit target can be estimated based on
the height of the triangle added from the
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breakout price.
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The white lines correspond to the size of
the triangle and its potential target, which
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is typically a 1:1 measured move.
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So, the profit target for the setup is the
distance of the triangle added to the top.
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Regarding stops, there are multiple areas
where you can place your stop orders.
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First, you can place the stop order beneath
the uptrend line.
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You can also use the low of the breakout candle.
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If the price is able to break out, you can
place your stop below the low of the candlestick.
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This way if the price reverses, you are not
waiting until the uptrend line is breached.
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This way you can keep more of your gains.
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Also, keep in mind, while ascending triangles
provide a profit target, that target is just
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an estimate.
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The price may far exceed that target, or fail
to reach it.
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This is why, using proper risk-reward ratios
is mandatory.
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Otherwise, the risk is that the triangle pattern
will transform into something else and will
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invalidate the reason you have entered in
that particular trade in the first place.
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