The 5 min ascending triangle trading strategy is a reliable strategy that captures the fast movement upwards on an intraday time frame. This trading strategy is quite easy to spot because the stock will make same highs but higher lows forming an ascending triangle pattern.
The chart above shows what an ascending triangle looks like.
The stock starts off with a wide range on the left and as it moves to the right hand side, the price volatility decreases. The stock will make relatively same highs but it will make higher lows as the pattern progresses.
The entire pattern experiences what we call a volatility contraction. The stock starts off with a volatile movement but as price moves to the right hand side, the movement becomes less volatile and eventually contracts.
The trader can draw two trendlines to connect the highs and the lows. A horizontal line and an uptrendline can be used to connect the prices. Prices often breakout as the two lines converges.
To read more about the ascending triangle, you can read this article How The Ascending Triangle Can Be A Great Setup For Longs In All Time Frames. This pattern can also be a bottoming pattern and it can also appear in futures as well. Read this article for another example of how great the ascending triangle pattern can be. How The FTSE 100 Formed An Ascending Triangle And Shot Up Higher.
In order to find the best trading setups, we need to have the stock satisfy certain criteria. That way we can avoid reading too much into a chart pattern.
Traders can often make the mistake of reading a trade setup into a stock and then taking bad trades.
Here are some things to look out for when you want to trade the 5 min ascending triangle breakout:
It is relatively easy to know when to buy the ascending triangle breakout once you have spotted the pattern in the 5 min charts. All you need to do is to buy the stock as it breaks above the highs of the pattern.
The chart of AAP above shows a 5 min ascending triangle trading setup in play.
AAP had a gap up in the morning and then it consolidated sideways. If you notice clearly, the consolidation had 3 same highs and 3 higher lows. The trader who spots this ascending triangle pattern can draw two trendlines to connect the highs and the lows.
The moment the stock breaks above the upper trendline, he or she can buy the stock.
It is always good to have an initial target. Since we are day trading, it is best to have at least an initial target which you can use for a reference. Sometimes the stock may move past the initial target and move higher giving us a very good risk reward trade.
In other times, the stock may just hit the target and then start to decline.
The chart above is the 5 min chart of the same stock AAP. This is what happened to the trade.
In order to set the 1st target, traders can take the height of the pattern and then project it upwards from the breakout area. Notice how the stock met the initial target and then started to drift lower.
Not all stocks will decline when the first target is met. Some stocks can continue to go higher and ride the 5 min uptrend higher. You never know how high a stock can go even in day trading.
If there is serious resistance overhead, then its better to take positions off the table. However, if there is not much resistance overhead then the trader can be a bit slower in taking profits.
One of the things that a trader needs to do is to protect his or her profits. Which is why its always a good idea to sell 1/2 of your position when an initial target is met.
The second thing that a trader needs to do is to "not let a profit turn into a loss".
This can be accomplished by moving the stop loss to breakeven when the 1st target is met. Once the 1st target is met, the trader can use a trailing stop loss such as the rising 5 min 20 MA to take profits on the rest of the position. You can sell the remaining 1/2 of the position if the stock drops below its rising 5 min 20 MA.
Since this chart pattern takes some time to develop, you will probably not find candidates in the first 15 min of the trading day. It will take some time to develop and therefore, you will most likely find trading candidates after the first hour of trading.
You might still find some trading candidates before the first hour if the pattern started off from the previous day's price action.
The trader can also use a scanning software to scan for stocks that make this kind of pattern intraday.
Knowing how to enter and manage the trade is not the only thing you need to know. You need to prepare for every eventuality and that includes being wrong. Not all trades will be a winner. It will be great to have a 60% winning rate. Try to shoot for a 70% winning rate.
The other 30% which are losing trades, you will need to have a stop loss to minimize your losses.
Let me walk you through another example of the 5 min ascending triangle trading strategy.
The chart above is the 5 min chart of ALXN. This stock gave a very very good ascending triangle play with extremely good reward to risk.
First of all, this stock had already been making a rounded bottom in the previous day. You can see how the stock breaks above the 5 min 20 MA and also the 5 min 50 MA. This is a first sign that the stock may be starting a new 5 min uptrend.
The next day, the stock started the trading day with a large green bullish bar. This gave us hints that the stock may have buyers coming in to push the stock higher for the day. The stock did not rise immediately but it traded sideways making the classic ascending triangle pattern.
It takes some practice to be able to spot the ascending triangle pattern but when you have enough practice, you will be able to spot them very easily. Be patient and learn to spot them.
Notice how the stock made same highs and higher lows?
The trader can draw two trendlines. The first one will be the upper horizontal trendline and the second one will be the uptrendline. When you connect the both of them, it is pretty easy to see the ascending triangle.
As usual, the trader can buy the stock when it breaks above the upper trendline.
How do you put a stop loss on this trade?
Depending on how aggressive you are:
The closer the stop loss you have, the more aggressive the trade will be. You might get stopped out easier but the reward to risk will be bigger. The beautiful thing about this pattern is if it breaks out nicely, it will rarely go back into the pattern.
The stock quickly met its first target but as you can see, it continued to rise and rise. This is the beauty of this pattern. The initial target is just a target, when you see the stock above its rising 5 min 20 MA and 50 MA, there is a big possibility that it might go higher.
The trader can sell 1/3 or 1/2 when the target is met and ride the other positions higher. A trailing stop loss can be used. In this case, the trader can sell the remaining position when the stock fell below the 5 min 20 MA.
You have now learned a simple day trading strategy that utilizes the classic ascending triangle chart pattern. This pattern gives you an initial target with the possibility of riding the intraday trend higher to give you a trade that has a high reward to risk ratio. Learn to spot this chart pattern in the 5 min chart and you just might be able to pull in some extra money day in day out.
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