An ascending triangle is a chart pattern that can be used to determine how high a stock will go upon a successful break out of the triangle. It is usually formed after a stock has experienced a substantial price increase. The stock price trades sideways for a period of time to consolidate the recent gains, and this typically takes the form of a triangle. If traded properly, this can be a very profitable set up for a trader.
1) Attempt to identify the ascending triangle pattern as early as possible. The triangle is characterized by a high price that consistently acts as resistance followed by a series of higher lows. On the accompanying chart of PHOT, the $.40 level acts as resistance to form the upper bound of the triangle while higher lows form the other rising trend line.
2) Calculate the target price level of the triangle pattern. This is somewhat subjective, but to be on the safe side only use the real candlestick bodies to determine the target price. Determine the height of the triangle by subtracting the lowest low of the triangle from the upper bound. On the accompanying chart, the breakout would increase the stock price by $.08. This is found by subtracting $.32 from $.40. The height of the triangle is then added to the upper bound to determine the target price level. On the chart, the target price level would be $.48 which is found by adding $.08 to $.40.
3) Wait patiently for the stock price to trade higher than the horizontal upper bound of the triangle. This is typically accompanied with heavier volume than what was seen during the formation of the triangle. Upon a successful breakout, place a buy order just above the breakout level. Prices tend to move quickly on a successful breakout so it is key to be ready to execute the trade.
4) Enter a stop loss in case of a false breakout. Protecting capital is first and foremost and a stop loss should always be entered. Place a stop just below the horizontal upper bound of the triangle. In this case, a stop at the $.39 level would protect against bigger losses and also confirm that the breakout was unsuccessful.
5) Enter a limit order to sell the trade at the target price level. In this case, a limit order would be entered at the $.48 level. Momentum may cause the stock price to continue higher, but it is best to stick to the original plan and sell at the predetermined target price level.
Follow these 5 steps every time without exception to successfully trade an ascending triangle pattern. It sounds so simple and can be as long as these steps are followed each and every time. In this case, a trader could have made a nearly 20% gain while risking 2.5% - 5% if the pattern failed and the stop loss was triggered.