Ascending and descending triangles are one of the oldest concepts in technical analysis. Since investors started documenting price patterns, triangular formations were among the first that grabbed attention.
The main characteristic of an ascending or descending triangle is that it revolves around a horizontal level. By “horizontal level”, we are referring to an area and not a fixed line. Because forex trading can be volatile, the patterns may look slightly different to the ones documented on the stock market when ascending and descending triangles were first seen. However, the rules for trading such triangles remain valid, and they prove to be effective patterns that allow investors to participate in a trend.
As the name suggests, these triangles are continuation patterns. This kind of pattern suggests that the market will stop, consolidate for a while, before resuming the primary trend. During a triangle’s formation, the price consolidates in an area until it eventually clears it. The way to spot a triangle quickly is to focus on a sequence of lower highs (descending triangle) or higher lows (ascending triangle). When the sequence forms in a horizontal area, ascending or descending triangles form.
The descending triangle in the chart above forms during a bearish trend. For whatever reason, the market appears to be unable to break the grey area for quite some time. However, all the bounces that follow only form lower highs. This is enough for some technical investors to suspect the price is forming a descending triangle.
How to trade an Ascending or Descending Triangle
In technical analysis, trading a triangle means trading its measured move. The measured move depends on the type of triangle formed. In this case, the rule says that the measured move will equal the longest segment in the triangular pattern.
Therefore, to trade a descending triangle:
- Wait for the market to dip below the horizontal area,
- Enter on the short side with a stop loss at the previous swing’s high,
- Target the measured move.
For an ascending triangle, investors usually:
- Wait for the price to spike above the horizontal area,
- Enter on the long side with a stop loss at the previous swing’s low,
- Target the measured move.
The chart above shows that descending or ascending triangles can offer great risk-reward ratios. Because the stop loss is placed at the end of the lowest segment in the triangle, the measured move by far exceeds the risk. In this example, we can talk about a risk-reward ratio of 1:2 or even 1:2.5. This means that for every pip risked in the trade, the reward is more than double.
Trading ascending and descending triangles is a basic approach to triangular formations. Trading theories like the Elliott Waves Theory go into more in-depth studies, looking at triangles from a variety of perspectives. We will learn more about this in the segment dedicated to Elliott Waves, later in the course.
- Ascending and descending triangles form against a horizontal level.
- The measured move is equal to the longest segment in the triangle.
- Ascending and descending triangles offer great risk-reward ratios.
- Triangles are defined by a series of lower highs (descending) or higher lows (ascending).