Bulkowski's Ascending Triangle Setup

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved.

This article discusses trading the ascending triangle chart pattern. Due to the shortcomings of the chart pattern, this is not the best trading setup. Most of the tests have large drawdowns with low profits, but there are some gold nuggets among the tests.

Ascending Triangle Setup Summary

Below you will find almost two dozen trading setups for the ascending triangle chart pattern. Pick the one you like and test it. Change it as necessary to get it to work for you. However, you may find that other chart patterns work better.

The best performing setup enters the trade when price rises a penny above the top of the chart pattern, and exits at the close three days later. It sports a 2% profit during an average hold time of 5 days, wins 65% of the time, has a win/loss ratio of over 3, with a maximum drawdown of 16%.

Ascending Triangle Setup Background

If you don't know what an ascending triangle looks like or how to identify it, then click here. I show an ideal version of the pattern in the picture to the right.

The theory behind ascending triangles is that they point the way to higher prices after an upward breakout. Testing shows they do breakout upward 70% of the time. Unfortunately, experience has taught me to look elsewhere for a chart pattern to trade because ascending triangles often don't perform up to expectations. I found that price rises for a few days, perhaps 5% to 10% or so and then collapses. In other words, it's rare that you can make money on these patterns for a position trade and you have to be nimble for swing trading.

Nevertheless, the ascending triangle chart pattern makes for an excellent trading platform to test various setups. Why? Because it has a flat top, so the breakout price is easy to figure out (it's a penny above the top trendline as opposed to a symmetrical triangle, which has a sloping top trendline). The ascending triangle chart pattern is also common, popular, and easy to spot in a historical data series.

Ascending Triangle Setup Methodology

I split my database into two pieces, in-sample and out-of-sample, each containing about half the number of ascending triangles. I did not divide them into two time periods. Then I tested the in-sample group using various methods to find what worked best. Most of the ideas centered around throwbacks -- quick moves up before price rounds over and drops.

After completing the in-sample tests, I ranked the results of each metric (such as profit per trade, win/loss ratio, drawdown, and so on), and summed the ranks. The test with the lowest score was the best performing.

Then I performed the same tests on out-of-sample data and ranked the results. I discovered that the best performing in-sample test dropped to near the bottom of the out-of-sample tests and the worst performing in-sample test became the best performing out-of-sample test. In other words, the results flipped between in- and out-of-sample.

This, of course, freaked me out. For the final word on the results, I switched to two other databases that extend back to 1991 (the smaller database also went back that far). Using them allowed me to boost the number of samples from 230 to over 1,000, with no duplicates. I threw out the earlier results and just used the out-of-sample results from the two databases. Those results follow.

Ascending Triangle Setup Results

The various results from the tests are listed below and an explanation of each test is in the next section. Here are the definitions for each column.

The Rank column is a rank of the sum of the ranks of many but not all of the columns. The sum with the lowest total is the best. The best performing test is listed first.

The Per Trade Avg P/L columns are the average profit or loss per trade in dollars and percent. Both are based on an investment of $10,000 per trade minus $10 for commissions each trade ($20 round trip). No allowance for slippage or other fees were included, and no allowance for cash factored into the tests.

% Wins is the percentage of winning trades. Avg Win is the average of all winning trades. Avg Loss is the average of all losing trades. W/L Ratio is the average win divided by the average loss. If losses are larger than the average win, then the value will be negative.

Max Drawdown is the largest equity drop from peak to valley during the trade. It represents how much profit you give back (worst case). Hold Time Loss is the maximum drop below the buy price during the trade. It represents how much money you could have lost if you sold when price bottomed. Hold Time is the average time the stock was held. # Trades is the number of trades counted in the test.

Items shown in red are ranked best in that column.

Rank	Test	Per Trade Avg P/L	Per Trade Avg P/L	% Wins	Avg Win	Avg Loss	W/L Ratio	Max Drawdown	Hold Time Loss	Hold Time	# Trades
1	3 day exit	$202.31	2.0%	65%	$295.92	$93.61	3.16	16%	18%	5	1030
2	Buy price >200-day SMA, 3 day exit	$189.27	1.9%	67%	$276.66	$87.39	3.17	11%	18%	5	698
3	Buy price >21-day SMA, 3 day exit	$201.72	2.0%	65%	$295.74	$94.03	3.15	16%	18%	5	1025
4	Buy price <200-day SMA, 3 day exit	$225.14	2.3%	62%	$335.78	$110.64	3.03	16%	14%	5	280
5	Buy price >50-day SMA, 3 day exit	$193.03	1.9%	65%	$289.91	$96.88	2.99	16%	18%	5	935
6	2 day exit	$174.36	1.7%	64%	$257.14	$82.78	3.11	9%	18%	4	1031
7	3 day exit. Stop: lower of today or yesterday -.01	$186.36	1.9%	64%	$294.16	$107.81	2.73	16%	13%	5	1034
8	4 day exit	$218.37	2.2%	65%	$326.65	$108.27	3.02	19%	18%	7	1034
9	2 day exit, stop is buy day's low-.01	$113.16	1.1%	60%	$249.16	$136.00	1.83	9%	10%	4	1034
10	5 day exit	$220.13	2.2%	64%	$336.81	$116.68	2.89	27%	18%	8	1033
10a	3 day or 5% exit, no stop	$158.96	1.6%	66%	$255.18	$96.22	2.65	16%	23%	5	1264
11	3 day exit, stop at low on buy date-.01	$138.95	1.4%	59%	$281.00	$142.05	1.98	16%	11%	5	1034
Rank	Test	Per Trade Avg P/L	Per Trade Avg P/L	% Wins	Avg Win	Avg Loss	W/L Ratio	Max Drawdown	Hold Time Loss	Hold Time	# Trades
12	5% profit, stop at halfway between buy price and fmtn low	$129.35	1.3%	67%	$352.52	$223.17	1.58	21%	18%	12	1033
13	9% profit exit, stop: fmtn-.01	$249.86	2.5%	69%	$621.83	$371.97	1.67	44%	34%	38	1030
14	10% profit exit, stop: fmtn-.01	$264.15	2.6%	67%	$671.22	$407.07	1.65	44%	34%	44	1030
15	7% profit exit, stop: fmtn-.01	$197.89	2.0%	73%	$515.48	$317.59	1.62	44%	34%	30	1032
16	6% profit exit, stop: fmtn-.01	$176.73	1.8%	76%	$463.57	$286.84	1.62	44%	31%	26	1032
17	5% profit exit, stop: fmtn-.01	$151.72	1.5%	79%	$406.50	$254.78	1.60	44%	31%	21	1032
18	8% profit exit, stop: fmtn-.01	$209.19	2.1%	70%	$565.57	$356.37	1.59	44%	34%	34	1031
19	5% profit, stop at buy day's low -.01	$56.50	0.6%	52%	$276.13	$219.63	1.26	14%	11%	7	1034
20	Exit day after a lower close	$(88.99)	-0.9%	60%	$255.46	$344.45	-0.74	19%	10%	4	1034
21	Exit day after a lower high	$(88.52)	-0.9%	59%	$261.83	$350.34	-0.75	26%	10%	5	1033
22	10% profit, stop at buy day's low -.01	$56.11	0.6%	36%	$358.40	$302.29	1.19	35%	14%	15	1034
23	Exit day after a lower low	$(94.18)	-0.9%	57%	$264.70	$358.87	-0.74	26%	10%	6	1030
Rank	Test	Per Trade Avg P/L	Per Trade Avg P/L	% Wins	Avg Win	Avg Loss	W/L Ratio	Max Drawdown	Hold Time Loss	Hold Time	# Trades

Ascending Triangle Setup Test Explanation

Unless otherwise specified, trade entry uses a buy stop a penny above the top of the formation (a penny above the highest high in the chart pattern). For the exit, sell at the close (as in the case of "3 day exit," for example) or the opening price the day after the exit signal. "Buy price >200-day SMA, 3 day exit," for example, means to set a buy stop a penny above the top of the ascending triangle only if that price is above the 200-day simple moving average (SMA) on the buy day. Once into the trade (day 1), sell at the close of day 4.

• 1. Exit at the close 3 trading days after entry. No stop used. This is the best performing, according to the rank of each column.
• 2. Buy price (a penny above the highest high in the chart pattern) is above the 200-day SMA. Exit at the close in 3 trading days.
• 3. Enter when the buy price is above the 21-day SMA, Exit at the close in 3 trading days.
• 4. Buy if price is below the 200-day simple moving average and exit at the close 3 trading days later.
• 5. Buy price (a penny above the highest high in the chart pattern) is above the 50-day SMA. Exit at the close in 3 trading days.
• 6. Exit at the close 2 trading days after buying, no stop.
• 7. Exit at the close 3 trading days after entry. Use the lower of today's or yesterday's low minus a penny as the stop price.
• 8. Exit at the close 4 trading days after entry with no stop used.
• 9. Exit at the close 2 trading days after buying, using a stop placed a penny below the low on the buy date.
• 10. Exit at the close 5 trading days after entry with no stop used.
• 10a. Exit at the close 3 trading days after entry or after 5% profit, whichever comes first. No stop is used. This is a newer test than the others and it ranks 11th, so I inserted it here.
• 11. Exit at the close 3 trading days after entry, using a stop placed a penny below the low on the buy date.
• 12. Exit on 5% profit, place a stop halfway between the buy price and formation low.
• 13. Place a stop loss order a penny below the formation's low, and exit on 9% profit.
• 14. Place a stop loss order a penny below the formation's low, and exit when profit reaches 10%.
• 15. Exit on 7% profit. Use a stop a penny below the formation low.
• 16. Exit on 6% profit Use a stop a penny below the formation low.
• 17. Exit on 5% profit. Use a stop a penny below the formation low.
• 18. Exit on 8% profit. Use a stop a penny below the formation low.
• 19. Exit after 5% profit, use a stop placed a penny below the low on the buy date.
• 20. Exit at the opening price the day after a lower close.
• 21. Exit at the opening price the day after a lower high.
• 22. Exit after 10% profit, and use a stop placed a penny below the low on the buy date.
• 23. Exit at the opening price the day after a lower low. This is the worst performing test of the bunch.

Ascending Triangle Setup Trading Example

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NOTE: This figure does not match the text. I've searched for the pic and haven't found it. Sorry!

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Shown on the right is a trade the system has identified using test #4: Buy if price is below the 200-day simple moving average and exit 3 trading days later.

The ascending triangle fits between the two converging trendlines, the top one is horizontal and the bottom one slopes upward. The thin red line is the 200-trading day simple moving average. Notice that the top of the chart pattern is below the simple moving average.

Place a buy stop order a penny above the top trendline, or 28.52. That gets you into the trade on May 28 when price pokes out the top of the chart pattern (although it's difficult to see in the chart) and a day before price shoots out upward.

Hold the stock for three trading days and sell it at the close on day 3.

In this example, a $10,000 investment would have made $443.32, or 4.4% on the trade.

-- Thomas Bulkowski

Written and copyright © 2010-2011 by Thomas N. Bulkowski. All rights reserved. Schizophrenia beats being alone.