The rising triangle pattern is one of three known triangle patterns that becomes visible when more and more buyers enter the market. The price is thus driven up to a known resistance level where it fails to push up further.
Price falls again but the price floor that is reached in the process is higher each time. This creates an ascending trend line which forms the bottom of the pattern.
The pattern is characterized by two distinct lines:
an ascending trend line connecting at least 2 higher bottoms
a horizontal resistance line connecting at least 2 price tops that are more or less at the same level
Eventually the buying pressure becomes so strong that a breakout from the triangle pattern occurs and the existing trend continues. That is why this ascending triangle formation in technical analysis is referred to as a continuation pattern.
Once the breakout above the horizontal line is a fact, it is assumed that the previous resistance level will take over the role of support level. It is not uncommon to see a retest of the earlier resistance level after the initial breakout.
The more points of contact there are the greater the recognition of the pattern and the greater the chance that an upward breakout will be recognized as such and retained as a bullish setup by technical traders.
However, keep in mind that the probability of a false breakout always exists, especially when this pattern occurs in a predominantly bearish long-term trend, the probability of such a false breakout is higher.
There are two ways to use this pattern in a trading strategy.
On the chart below, the stock is bought during (1) or just after the breakout out of the pattern (2). The stoploss is then placed either just below the previous candle (3) or below the most recent swing low (4).
These are just two possibilities; wider stops are, obviously, another option.... It depends entirely on your own investment strategy.
For the second approach, after the initial breakout (1) one waits until the price drops again to the previous resistance level (2). Only then is a position bought.
Using this method, you may place the stoploss a bit further because you are waiting for the price to fall back a bit. The disadvantage is that if the price immediately continues to rise after the first breakout, your window of opportunity is closed.
Typically, the difference between the horizontal line (A) and the lowest price point of the rising trend line (B) is used to determine the distance to the price target (C).
Below is an example of such a target projection for Iridium Communications Inc. stock (IRDM).
However, this is a very general rule and in reality it is far better to determine the price target in regard to your initial stoploss. For example, you could use once your stop distance to determine a minimum first target price. In that case the price target is exactly the same size as your stoploss and thus you get a risk/reward of 1/1.
Suppose a long position was opened at $39,5 (entry) with an initial stoploss level at $37,25. If the first target is set at equal distance to the stoploss we get $41,75. When this price level is reached you can opt to raise the stoploss to breakeven. The second target can then be placed, for example, at twice the stop distance (in this example at $44)
Don’t like fix price targets because you would like to benefit from the rising trend for as long as possible? Then trailing stoplosses are the best choice for you! Several ways are possible, below we briefly discuss two ways of trailing stoplosses.
A 10-day moving average line is plotted on the chart. As soon as the price closes below this line you sell the long position.
This method is based on the price trend, which results in higher bottoms and higher tops. As soon as a new higher bottom is confirmed, the stoploss is placed below the most recent bottom.
The ChartMill Stock Screener supports finding ascending triangle patterns. On top of that ChartMill will also automatically draw the trendlines which make up the pattern. On the indicators tab you can just select 'Ascending Triangle' from the 'Chart Patterns' filter on the 'indicators' tab. There is a fully configured screen available linked to this article. This is a direct link to the screener.
The ChartMill Team