The upper line is identified first, as running along the highs and is called the trendline.
When in the channel, prices are expected to bounce off both upper and lower boundaries. The more such reversals occur, the more reliable the pattern.
Another way to trade this pattern is to wait for the price to break through either trendline.
A break out above the upper trendline generates a strong buy signal, while a break down below the lower trendline generates a strong sell signal. When the price breaks through the trend line (upper line), it might indicate a significant change in trend.
Keep in mind that just like all the other patterns, channels might be prone to false or premature breakouts, which means that price may retreat back into the channel.
Descending channels are useful due to their ability to predict overall changes in trends.
Descending channels, like ascending channels, are a tool for determining whether the trend in price will continue.
Another strategy of using a descending channel is to identify where the price fails to reach the lower line.
The direction of the break will determine whether it’s a continuation or a reversal.
Vincent Nyagaka is a Professional Trader, Analyst &. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Checkout Vincent’s Professional Trading Course here.