Ascending channels are patterns of trend continuation with an upward price movement as their primary feature.
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What Is an Ascending Channel?
Ascending channels are trend continuation patterns that have an ascending price action as their main characteristic. They have a bullish market structure.
On the other hand, a descending channel is a bearish continuation pattern with significant implications for the broader scope of the market. Ascending channels are exactly the opposite: they are bullish continuation patterns with significant implications for the market moving forward.
An ascending channel is a series of price highs and lows contained between upward-sloping parallel lines. These trendlines act as resistance and support for the asset price as it advances. The price must touch the support or resistance line at least twice before an ascending channel is confirmed.
The Importance of Ascending Channels
Before we discuss how to trade an ascending channel, it is important to remember the significance of ascending channels themselves. These are continuation patterns that are strongly indicative of bullishness. They suggest that a trend has been established that will likely continue moving forward.
Ascending channels also imply that a stock has been growing steadily in a certain direction over a period of time. This growing trend can be an important factor in determining how long it will take for a trader to profit from a given trade. Trades are likely to have longer holding times in order for these trades to be profitable based on these patterns.
How to Trade an Ascending Channel?
To trade an ascending channel, it must first be identified as such. They are a series of higher highs and higher lows. You can easily identify them on a price chart, as they are clearly marked by two upward-sloping parallel lines.
A trader can use a number of technical indicators to find and confirm an ascending channel pattern on a given price chart. Bollinger Band indicator, a common trend continuation indicator, can be used to identify it. The moving average convergence/divergence (MACD) indicator can also be used.
Trading Strategy for Ascending Channels
For a bullish ascending channel, a trader will open a long position when the stock breaks through resistance and closes above it. They typically offer high-probability trades. Once the stock breaks through resistance, it is likely to continue moving in the same direction – therefore, traders hold their positions for a longer period of time in order to keep profiting from the long-term trend. These channels are especially useful for swing and position traders, although day traders can also take advantage of them.
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Let’s discuss some of the trading strategies linked to this channel pattern!
Breakdowns: Traders should seek additional signs of pattern weakness before entering a short position when the price of an ascending channel breaks below the lower channel line (support). One such red flag is a price that repeatedly fails to cross the upper trend line. Additionally, traders can watch for a negative divergence in a well-known indicator, the relative strength index (RSI). For example, if the price of a stock is making higher highs, forming an ascending channel but the indicator is making lower highs, this may indicate that upward momentum is weakening.
Support and Resistance: When the price of stock comes near the ascending channel’s lower trend line (support), traders may choose to enter a long position, and they may close the position when the price approaches the upper line (resistance). If it suddenly takes a turn, a stop-loss order should be placed just below the lower trend line to protect losses. When employing this method, traders must make sure that there is sufficient space between the parallel lines of the pattern to establish an appropriate risk/reward ratio.
Breakouts: When a stock’s price rises over the top of an ascending channel, traders may decide to purchase it. It is wise to utilize additional technical tools to verify the breakout. For instance, traders may wait for the breakthrough to be accompanied by a big increase in volume. Some may want to confirm if there is any overhead resistance on charts in higher time frames before taking a position.
Ascending Channel vs Envelope Channels
Image: Envelope Channel
The ascending channel pattern is very similar to the envelope channel pattern in some aspects. Both are continuation patterns that are strongly indicative of bullishness. However, there are a few differences, too. The most significant one is that the envelope channel pattern has both upward and downward price bands, while the ascending channel only has an upward slope.
Image: Ascending Channel
The ascending channel pattern is, therefore, a little bit narrower than the envelope channel. It is also easier to identify on a price chart since it is clearly marked by parallel trendlines.