What is the Ascending Triangle?

An ascending triangle is a pattern that can be detected on daily stock price charts. It is characterized by the highest selling point for each day being relatively consistent, while the lowest selling point each day rises from day to day. There is a theory that such a pattern will wind up with the high and low marks meeting, at which point the stock will begin to rise sharply in price.

To spot an ascending triangle, an investor will need to consult a detailed stock chart. Such a chart will use the candlestick system. This displays the days on the horizontal axis. The vertical axis has a shape for each day's trading that consists of a block showing the difference between the starting and closing prices, with lines extending at either end of the block to show the highest and lowest prices during the day. In some versions of such a chart, the blocks will be solid or hollow, and use one of two colors, to display more visibly whether the top of the block displays the start or close price, or whether the stock moved up or down over the course of the day.

The triangle pattern of an ascending triangle is, logically enough, made up of three lines. One is a vertical line showing the day the pattern began to emerge. A second is a flat horizontal line running across the points marking the daily high price. The third line is an upwards diagonal line running across the points marking the daily low price. It is rare that these lines will be precisely straight in reality, and different investors will have different tolerances for how consistent the lines have to be before they take them as a signal.

Investors who use the ascending triangle as a signal usually believe it is caused by specific market behavior. One possible explanation is that the diagonal line shows that the stock is generally rising, while the horizontal line shows some form of artificial limit on the stock price. This could be that there are a lot of fund managers or automated trading systems that have been set up to sell that particular stock at that particular price. This will usually create excessive supply of the stock and prevent it rising in price.

Those who use the ascending triangle often believe the price will rise rapidly either at or just before the point the lines cross and complete the triangle. Using the chart to track the lines may allow them to predict when this point will be in advance. One explanation for why the price rises rapidly is that at this point, the demand for the stock will be so high that the artificial limits no longer have any effect.