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The Ascending Triangle pattern has a horizontal top line (1, 3, 5) representing a resistance level, and an upward-sloping bottom line (2, 4). The Breakout can either be up or down, and the direction of the Breakout will determine whether the Target Price is higher or lower.
This pattern is commonly associated with directionless markets, since the contraction (narrowing) of the market range signals that neither bulls nor bears are in control. When the price of a security consolidates around highs it might indicate that a significant downtrend is ahead.
If the price breaks out from the bottom pattern boundary, day traders and swing traders should trade with the DOWN trend. Consider selling the security short or buying a put option on the downward breakout price. To identify an exit, compute the target price by subtracting the pattern height from the breakout point. For downward breakouts the breakout level is the price at the lowest low within the triangle (2). The pattern height is the difference between the level of the top horizontal line and the lowest low.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.
