Descending and Ascending channels Guide (PDF)
The Channel Pattern is one of the most widely used technical analysis patterns among traders. The price in the market keeps shifting between two parallel lines until this channel is formed. However, based on the direction of the channel, traders could identify the existence of an uptrend or a downtrend in the market. According to this, they take their buy and sell positions. In this course, we will talk about this pattern in detail, and define ascending channel pattern, descending channel pattern, and horizontal channel pattern, in order to understand well all the types of the pattern.
Channel patterns FAQ
What is a channel pattern?
A channel chart pattern is a continuation pattern used in technical analysis. This pattern forms by a combination of two parallel lines based on the price movements in the forex market. However, most of the higher highs and higher lows represent an upward trend. while lower peaks and lower lows represent a downward trend. The upper trend line is known as the resistance line that links the highest levels of price fluctuation. Whereas, the support line reflects the lower trend line which ties the lows of price movements.
It exists three main types:
- The ascending or rising Channel Pattern
- The descending or falling Channel Pattern
- The Horizontal Channel Pattern
Despite the accuracy and reliability of this pattern, it presents some limitations specifically: This channel pattern is suitable for long-term patterns. Moreover, The placement of the uptrend lines and downtrend lines is individual and takes time and practice.
How to trade with channel chart pattern ?
A reliable trend line links two or more points that define the trend. However, a channel determines the current direction of price movement and often identifies the precise point at which that direction will change. In fact, Investors anticipate that the price volatility will remain moving inside the channel chart. They believe that channels will assist them with the best guidance for entry and exit points. Hence, investors will take the decision to purchase at greater peaks and sell at lower troughs.
Trading channels can be done in two ways: trading the pattern or trading the breakout after the trend has finished. Firstly, trading the pattern requires setting a position that is compatible with the trend’s current direction. Secondly, trading the breakout after the trend has been done, will change the direction of the trend and helps traders find the most efficient entry and exit points. Although trading within the channel is profitable for traders, whenever a breakout happens a greater offer opens for them. The breakout of the channel shows a sign of a trend reversal.
Traders need to be aware of false breakouts. Therefore, it is better to wait for the candle to close before taking any position. The price target for the pattern is equal to the channel’s height. Investors set their stop losses above and below the trendlines, to avoid losing an unexpected amount of money.
Ascending channel pattern example
The Ascending Channel Pattern is known also as “ the channel up ” or “ the rising channel ”, also we can say bullish channel. This pattern represents a rising sloping of two parallel lines that describes an uptrend of the price action in the market. In fact, ascending channel pattern with a breakout through the resistance line shows the sustainability of the uptrend price. Besides, a rising channel with a breakout at the downside shows that prices will keep falling for a period of time, which means that the trend changes.
Additionally, the ascending channel needs to be employed in cooperation with other indicators, this will protect the investor from false breakouts. After the breakout, traders anticipate the price target for this pattern. It is equal to the height of the channel.
There are two types of ascending channel :
Ascending channel with a breakout at the upside shows the durability of the uptrend price.
In a rising Channel, traders will keep their long positions to earn a profit from the rising price movements until a breakout happens. Whenever the price trend hit the support line, traders will take their short positions.
How to draw a bullish channel pattern ?
To draw a bullish channel, you need to follow these small steps:
- You need to draw an uptrend line.
- Draw a parallel line to the uptrend line. This line need to intersect the recent highs of the price movements.
- Do not try to force the second line to be parallel with the uptrend line.
Descending channel pattern example
A descending channel Pattern or falling channel is a negative-sloped continuation pattern. Indeed, the price of a security moves between two negative parallel lines. The price will keep falling until either it surpasses the support line or the resistance line. However, the continuation of the downward price trend happens if the price movements break through the support line, called “A breakout at the downside”. Whilst, A breakout at the upside happens when the price movements cross the resistance line.
In a descending Channel Pattern, investors will keep their short position to earn a profit from the downtrend price movement until a breakout happens. If the breakout occurs, traders believe that price will go up in the market. Therefore, they will open long positions in order to make money from these rising prices.
Horizontal channel pattern example
A horizontal channel Pattern or flat channel presents two horizontal parallel lines based on the price movements in the market. This pattern gives traders accurate points on whether they should enter or exit their positions. Moreover, in this pattern, buying and selling forces are identical until a breakdown or a breakout happens.
It exists two forms of horizontal channel pattern:
- Horizontal channel with Breakout at the upside :
The breakout point is the point where the price hits the resistance level. This represents a signal for traders of an opportunity to buy.
2. Horizontal channel with Breakout at downside :
The breakdown point is the point where the price passes through the support line. This is a signal to traders for the existence of an opportunity to sell.
Conclusion
Briefly, one of the most popular technical analysis patterns among traders is the channel chart pattern. This chart pattern can assist them in identifying the trend’s direction. Based on this evaluation, traders can decide on whether they will take long or short positions while investing.
Key takeaways
- The Channel chart pattern is one of the most popular and recognized tools of chart analysis.
- It offers greater guidance for entry/exit positions.
- Each type of this pattern could have either a breakout or a breakdown.
- With the Bullish Channel, price movements reach higher peaks and lower lows.
- With the Bearish Channel, the price moves by higher highs and lower troughs.