Interpreting Ascending and Descending Triangle

 

Hello there, this is tradingpedia.com and this video deals with a technical analysis concept called ascending and descending triangles. These continuation patterns and triangles are everywhere. They are one of the most common patterns that exist on technical analysis and they form on any type of market.

Overview

On the FX market is a bit difficult to interpret an Interpreting Ascending and Descending Triangle because the volatility is a bit higher when compared to other markets. It is one thing to look at a continuation pattern like this on the stock market and another thing to do the same on the FX market. But with a bit of a flexibility in mind and respecting the rules of a triangle, anything can be done.

This is how a triangle looks like. During an ascending triangle’s formation you will see bullish price action and then the market meets resistance at an area. It is not a specific level, but an area, give it or take some twenty or thirty pips, something like this. This is the GBPUSD 4h chart, known as one of the most volatile currency pairs on the FX dashboard.

And then the price meets resistance against a horizontal base. At first, it is being rejected. However, bulls step in again, try again for the area, maybe delivering a marginal high or not, but this is an area that rejects the price. Next, the market moves to the downside, but fails to take these lows, and then tries again, fails again, and eventually breaks higher. This coiling price action against a horizontal base is what makes an ascending or descending triangle.

In order to a textbook material if you want you may connect these levels using a trendline in order to note the price action. And then, if you copy this one and you project it on the lows, the ascending triangle becomes obvious. So the price action coils, builds energy to break higher, and eventually breaks highs.

An ascending triangle differs from a regular triangle in the sense that the price action gets closer to a horizontal resistance. That is the main difference. It also has a measured move – 75% of the longest wave of the triangle. It doesn’t necessarily mean that the longest segment is the first one, but usually it is. This one, projected on top of the horizontal area, gives the minimum distance that the market should travel.

The Minimum Distance

The minimum distance means that we should not expect a reversal after that, it only confirms the pattern. The same rules discussed for the ascending triangle are valid for a descending triangle, only that this time the price finds a bottom, or a temporary bottom, and bounces from it, but the bounce is not strong enough to break the series of lower highs and eventually the support will break.

Often, the price will retest the upper or lower edge of an ascending, respectively a descending triangle. In this case, GBPUSD rallied from the lows in an almost vertical move, and at one point in time it hesitated. It was rejected, came back, and even coiled all the way until breaking here. So this is an ascending triangle – the first segment, the second one, this one here, like this, and then another move here, and eventually it popped higher.

When it did so, the measured move is the longest segment projected from the breakout point and that is the minimum distance that the market should travel. This is called trading with a pattern recognition approach and this triangle it may not look like an ascending triangle, but how about this one? You can interpret this one being the first segment, this the segment, this the third, the fourth, the fifth, and then it broke higher. What is important to remember here is that these five segments, against a horizontal resistance, always lead to an ascending triangle, if the price will not break the series of higher lows. Obviously, the opposite is valid when you trade a descending triangle.

Conclusion

To sum up, what is important when dealing with ascending and descending triangles is to remember that these are classic technical analysis patterns. They come from the stock market in the United States but can be used on any market.

At one point in time, during a trending market, the price stalls at a level and it forms a continuation pattern. It has some troubles continuing, either to the upside or to the downside. The series of higher lows or lower highs reveal the strength of the trend. By the time the price breaks the horizontal base of the triangle, you simply check the longest segment of the triangle, project it from the horizontal base, and that is the minimum distance that the market should travel.

And that is how you trade ascending and descending triangles. They form on all markets and on all timeframes. Bye bye.