Chart Smarts: How to Trade the Ascending Triangle

Technical trading is one of the most attractive strategies on the market today, and for good reason. After all, through technical analysis, traders can generate substantial profits by looking at charts alone – but as anyone who’s every tried technical trading knows, there’s more to it than that…

It’s not hard to learn about technical patterns – any halfway decent investing website or trading book should fill you in on a half-dozen price patterns and strategies that purport to turn novice traders into gain-makers with hypothetical examples. But more often than not, those patterns are noise.

This week, I want to talk to you about real world trading, using real stocks and real profits as examples.

The pattern we’ll focus on today is one of my favorites during bullish market movements: the ascending triangle. Here’s everything you need to know to scour a chart for this potentially profitable pattern…

First, though, let me tell you about the background for this article. In the last year, I’ve been developing a technical trading strategy that focuses on penny stocks. For the past several months, I’ve been sending my technical trading research to a relatively small number of BETA testers, offering recommendations on which stocks to watch, when to buy, and when to sell. That Penny Momentum Trader BETA ended last week, and I’m happy to say that the results were strong (you can learn more about the system here).

Today’s example comes from that BETA. As a result, it’s not some armchair quarterback example using ideal entries and exits; it’s a real time trade.

So, let’s get to it…

Like I said, the ascending triangle pattern is one of my favorite technical setups. That’s because it’s easy to spot – even for new traders – and has a relatively high occurrence of breakouts (in other words, we get fewer false-positives with this pattern).

Simply put, the ascending triangle pattern is marked by higher lows on the downside (an uptrend) and a set resistance level to the upside. Share prices bounce in between that uptrend and resistance level, getting squeezed closer and closer to the resistance level along the way until shares break above it. When they do break above, we have our buy signal.

Take a look at the example below with shares of International Assets Holding Corp (NASDAQ: IAAC):

Looking at this chart, you can see how it would be easy to spot this pattern back in August and September, well before the “buy” signal was generated. But knowing when to buy is the biggest challenge with this pattern.

As shares bounce higher between that uptrending support level and overhead resistance, it’s easy to be lured into buying shares of IAAC early, back in August or even July for instance. But that’d be a big mistake. When it comes to technical trading, never buy shares until you get confirmation. What’s confirmation?

Basically, confirmation happens when shares prove that they can sustain a certain price level. In the case of an ascending triangle, confirmation happens after shares break above resistance, and then hold that level. I like to buy ascending triangle breakouts on the second day after shares move above that resistance level – that way, the breakout is confirmed, but shares haven’t had too much time to run higher.

For a value investor, it’s counterintuitive to wait for shares of a stock to move higher before buying shares. We want to buy at the lowest point possible, right? Not necessarily…

The breakout is what took IAAC from being some random stock to being an ascending triangle. It’s the confirmation that makes the setup a high probability trade and not just a shot in the dark. By waiting for a breakout, you’ll always miss out on a bit of upside action, but you’ll also protect yourself from losing money more often than not. In the end, I recommended buying shares on September $14 for an entry price of $17.48.

So, using real money, how’d readers end up faring after my sell recommendation came around? Quite a few banked double-digit percent gains for profits like $1,800 and $2,300. One inventive reader even decided to buy options on the trade, and ended up closing out gains of 140% in less than a month.

Remember, the key to profiting from the ascending triangle isn’t spotting the pattern – anyone can do that. Instead, focus on holding off your entry until you get price confirmation. That’s the key to becoming a profitable trader…

Obviously, there’s a learning curve to technical trading. But taking a look at real world trade examples is your best bet as you build out your technical toolbox. I’ll be back tomorrow with a look at how my BETA readers traded another predictable technical setup.

Cheers,
Jonas Elmerraji
Penny Sleuth

November 22, 2010

Chart Smarts: How to Trade the Ascending Triangle was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

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