Ascending and Descending Triangles
This is a bullish formation that will usually form during the uptrend as a continuation pattern.
As you can see from below there is a slight rise up toward the top of the triangle and briefly trades above this level. This is why you will often want to leave the orders a little further away from the pattern as not all patterns will be perfect. The price has then broken through the floor of the pattern which would have triggered the sell stop. The price has then continued to trend lower and would have triggered the take profit giving you a gain of over 350 pips.
This is one of the main reasons this pattern is one to look out for. As it is formed during a long consolidation period, there will usually be a large movement after this giving the opportunity to make large gains with only a small risk.
The below example is NZD forming a descending triangle over a month long period in the past few weeks. The pattern is still within the triangle pattern allow small long and short trades until the pattern is broken either to the top side or the low side. The example of entry points, stop limit sell and buy just outside of the pattern to allow for a little volatility.I have used the hight of the triangle to give a general level for the take profit and a stop loss would be placed back within the triangle. This was a pattern I was monitoring live on my blog offering this trading setup. Within the triangle a clear flag can be seen in red putting the bias to the downside.
Two or more equal highs will form the horizontal line on the top. Then you will need two or more rising troughs from an ascending trend line that converges on the horizontal line as it rises. When judging how good the signal is you can use the below criteria.
Trend – Firstly to qualify as a continuation pattern you will need to have a strong trend to start with. As this is a bullish setup the quality of the setup is more important than the duration of the current trend.
Top Horizontal Line – You need to make sure that you have a minimum of 2 highs hitting the top horizontal line. The highs do not have to be exact but they should be within a reasonable proximity.
Lower Ascending Trend Line – Again you need to make sure that you have at least two hits on the lower ascending line. The lows should be successively higher and there should be some distance between the lows. If a more recent dip is equal or less than the previous low, then the pattern is void.
Duration – Using this method, you are looking at longer time frames that can go from a few weeks to many months but you would be looking at an average of 3 months.
Volume – During the development of the setup, you will normally find a decrease in volumes. Once the breakout comes through it can be confirmed through an increase in volume. But this does not always have to be the case for this setup.
Return to Breakout - During the breakout stages, you will find that the resistance line (top horizontal line) turns into the support level and after the breakout, the price can drop back to test this new support line.
Target – Once the breakout has occurred to find the price projection you need to measure the widest distance of the pattern and apply it to the resistance breakout.
The descending triangle (the opposite of the ascending triangle) indicates a bearish formation that forms during a downtrend.
In this example, we look how to trade within the triangle pattern. Here we see the recent setup in gold where the triangle is bouncing off a whole number. A buy limit order can be placed just above the support line with a stop loss just below it. Then trades can either be exited manually when you believe the bounce has faded off a take profit can be placed at the top of the triangle. But you may need to move this depending on the time it takes before either stop is hit