Good afternoon, thank you for joining us today in Part 4 of 5 chart Patterns that work.
In this series, we have so far looked at the following chart patterns:
This week we are looking at another chart pattern that works, and that we often use to come up with our trading set up; THE ASCENDING AND DESCENDING TRIANGLE CHART PATTERN.
First let’s consider Ascending Triangles:
Ascending triangles are classified as continuation Patterns. Here are the key elements that make up an ascending triangle:
1. Bottom Trend Line (Support)– An ascending triangle is characterized by a bottom trend line that is formed as the price continues to set higher lows. The more touch points on the trend line, the more reliable it will be.
2. Horizontal Resistance Line – An ascending triangle also contains a flat horizontal resistance line that is formed as the stock continues to reject its previous highs (for a given period). Once again, the more touch points on the resistance line, the more reliable the pattern will be.
It looks a little something like this:
You might be wondering how the chart pattern get to be formed?
What happens during the formation of an ascending triangle is that there is a certain level that the buyers cannot seem to break (red resistance line).
However, as evidenced by the higher lows (green uptrend support line), buyers will gradually push the price up, hence we end up with an uptrend of higher lows.
As buyers and sellers keep putting pressure, a breakout will become inevitable.
Though a price breakout is inevitable, the big question is, “Who will break the price, buyers or sellers? Will the buyers be able to break that resistance level, or will the resistance be too strong?”
Well, the answer is, most of the times the price will break the resistance area and go up.
However, it is not always the case, sometimes, the resistance is too strong for buyers to break.
That’s basically THE ASCENDING TRIANGLE CHART PATTERN.
Now let’s look at its inverse, the DESCENDING TRIANGLE CHAT PATTERN
In a descending triangle chart pattern, as can be seen on the sketch chart above, there is a string of lower highs which forms the upper line (red resistance line). The lower line is a support area (green horizontal line) in which the price seems to be failing to break.
Just as with ascending triangles, most of the times, the price will break the horizontal support line, and continue with the move lower.
As mentioned in last week’s Pop up chat, there is usually psychology behind every chart pattern; and ascending and descending triangles are no exception.
Follow me closely as we will now ‘investigate’ the PSYCHOLOGY behind ascending triangles:
To make the analysis easier, let’s think of the ascending triangle pattern as a visualization of an ongoing battle between the bulls (buyers) and the bears (sellers).
The bulls keep pushing the stock up in price until they get overpowered by the bears/sellers at the horizontal resistance level.
It is at that resistance level that bears/sellers attempt to push the price down.
Though sellers are somehow successful in pushing the price down, they are however unable to push the price to the previous low levels, as bulls/buyers are persistent, and the price sets a higher low (bottom trend line).
This pattern continues until the price action becomes confined to the vertex of the triangle, representing a pivotal moment in this battle. At this point, either the bears will win, and the stock will break the bottom trend line, or the bulls will win and break the horizontal resistance line.
If history is anything to go by, this pattern favors the bulls, and if the horizontal resistance line is broken, the bulls will be able to push the price up, triggering a breakout.
This same psychology also applies to descending triangles, but in reverse.
Now let’s looks at how we can to make money from this chart pattern:
#1. Wait for the Breakout
Be patient, wait price to break above the horizontal resistance line before placing a trade.
#2. Lookout for Volume
High volume usually represents conviction behind a move, indicating that a large number of traders want a position in the stock. While above average volume is not necessary for an ascending triangle pattern breakout, it may increase the likelihood of a stronger move.
#3. Look for Confirmation
If an ascending triangle breakout is genuine, the flat line resistance level should become a support level. If the stock starts to pullback after the breakout, you should look for the previous resistance level to hold as support. This will help confirm the legitimacy of the breakout. It also allows traders who missed the initial move to take a position.
#4. Have an Exit Plan
All trades require an exit plan for both favorable and unfavorable outcomes.
For ascending triangles, Stop loss should typically be placed just below the previous horizontal resistance (which will now be acting as support).
Consider the sketch chart below for the ideal move to target for take profit:
Now let’s move on from using sketch charts to using real-life charts, showing Ascending/descending triangles in play.
First let’s have a look at the daily chart of JSE listed Reinet Investments
The above chart shows an ascending triangle pattern in play, which started forming in March 2018, and the break-out from the horizontal resistance eventually happened in August 2018.
Let’s look at another real-life example, this time, we look at Cryptocurrencies, Bitcoin (BTC) to be specific.
Now, for those who have been following cryptocurrencies, you must know that most of them experienced big price drops, which resulted in the Bitcoin price fall from above $6,000, to its current levels just above $3,000.
But how many of you knew that the break from $6,000 was actually a descending triangle chart pattern that was playing out?
On the above daily BTC chart, the descending triangle chart pattern started forming as way back as February/March 2018, and the breakout only happened in November 2018.
Let’s look at current set ups that we can use now, and potentially make some profits.
JSE Listed IT Services Provider, EOH Holdings:
According to Lester Davids, our Trading Desk Analyst:
“The key support level of R30.33 appears vulnerable to a breakdown with lower highs being made – a descending triangle formation (bearish).
A break of the horizontal support around R30.33 support will open up R26.68 and R23.90 as potential targets.”
As of yesterday’s close, the stock closed at R30.35; so we are monitoring for a close below R30.33 to pull the trigger on the ‘short’ trade.
A Silver Futures potential long trade on the basis of an ascending triangle that is forming.
On the daily chart, a convincing close above $14.90 is what I’m looking for a potentially entry on the trade.
Together with the EOH trade, we will continue to monitor and adjust were need be in response to what will be happening in global financial markets.
JOIN US again next week for the ‘finale’ as we will be talking about RISING AND FALLING WEDGE PATTERNS
Until then, let’s keep it profitable!
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