Using Ascending Triangles In Daytrading

Daytraders can use the same patterns from the daily charts that swing traders do, but with the intention of opening a position based on the initial breakout rather than the continuation the following day. The ascending triangle is a perfect example of such a pattern.

The Ascending Triangle Defined

The ascending triangle is a pattern which can build up over several days or several weeks, and it traces itself out on a chart in a shape exactly like the name describes. Working with all lengths of price bars, from five-minute to daily bars, it's equally powerful in any time frame. Like most patterns, the breakout potential is greater in those patterns that form over a longer period of time.

An ascending triangle is formed when a specific resistance level is tested a minimum of three times, but ideally at least five. During this testing period, each price bar following the initial test shows a higher low than the last. This type of price action shows that traders and investors are willing to pay a higher price on each pullback to open a position.

As with any pattern, the occasional anomaly in price action is acceptable. Thanks to recent volatility, fewer and fewer textbook examples of chart patterns are appearing, and technical analysts are forced to loosen their definitions of acceptable triangles.

Using the Ascending Triangle For Daytrading

Often in my columns you'll notice that I mentioned that swing traders should wait to open a position on the day following the breakout, because so many moves only last for one day and fail. These moves are what I refer to as "false breakouts." Daytraders, on the other hand, are usually looking to go home flat at the end of each day, and thus are not subject to many of the problems resulting from holding failed breakouts from daily patterns overnight.

Retracements and Stop Placement

Often following a breakout move, a stock will retrace. When the breakout results from an ascending triangle formation, the stock should find support at the breakout level, because former resistance becomes support. For this reason, I place my initial stop roughly 1/4 point below the top of the triangle. In a situation when the low of the day prior to the breakout is not more than 1 1/4 points below the top of the triangle, I will place my initial stop underneath that low.

Real World Examples

An ascending triangle can be based on a combination of intraday and closing prices. I use a 1/4 point move above the top of the triangle for my daytrading entry.

In the case of Alopharma (ALO | Quote | Chart | News | PowerRating), an ascending triangle formed over a six-day period. The stock was unable to break through 65 after five attempts. On the sixth day, the stock opened in a position that formed the fourth higher low. Intraday, it broke out above resistance and I entered my order when a trade was executed at 65 1/4, which was 1/4 point above the resistance level. I filled a bit higher due to the larger-than-average spread. The stock peaked at 66 7/8 that same day.

In a second example, Corning (GLW | Quote | Chart | News | PowerRating) shows us an example of a four-part triangle. This example demonstrates that it's not always necessary for the triangle to reach its apex before exploding. In this case, the top of the triangle was 250. On the fifth day of consecutive higher lows, Corning broke out of the pattern and moved to an intraday high of 257 3/16, offering a substantial point return for a daytrader. Keep in mind that many daytraders think in terms of point gains and point losses, as opposed to percentage moves. Note how risk was minimized by closing out the position by the use of a trailing stop. Traders who held over until the following day would have given back their gains.

PC Connection (PCCC | Quote | Chart | News | PowerRating) provides a unique example. In this case, after the large-range day (the first day of the triangle), a near-term top was established. The following three days did not show a series of consecutive lower lows, but rather a short-term consolidation. Because it's so rare to find textbook examples of chart patterns, it's important to loosen the definition from time to time. I still consider a triangle in an ascending pattern if at no point does a price bar take out the low of the left side of the triangle.

The top of this triangle was at 58 1/2. Entering on a 1/4 point move above the top of the triangle created the potential for a 3 1/2 point gain at the close. The stock peaked at 62 that day, and closed 3/16 lower, at 61 13/16.

Conclusion

The ascending triangle, while a seemingly simple pattern, offers quite stunning opportunities. The breakouts resulting from this formation can be significant. The key to the pattern is to never disregard a chart because it does not meet the specific requirements of the textbook pattern. It also reminds daytraders to look not only at the intraday moves, but to also take advantage of moves based on bigger-picture setups, in this case, the daily charts.

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