The descending channel pattern (also called the falling channel) is a bearish chart formation. It develops within pronounced downtrends in asset pricing.
Forex traders view descending channels as evidence of weakened strength in the counter currency. Accordingly, it is frequently used to sell a currency pair and join the prevailing market downtrend.
It appears as two parallel lines in a downward trend, forming resistance and support levels for the price. The upper boundary is formed by connecting the lower highs, while the lower boundary comes from connecting the lower lows.
The descending channel is strictly a bearish chart formation. But it has a bullish alternative called the ascending channel, where everything is completely opposite.
Contrary to trend-following strategies, descending channels may also be used to project a shift in a prevailing bearish trend. This is done by waiting to buy the market on price breaks above the channel’s upper extreme.
To trade reversal breakouts, you buy the market above the upper trend line. In doing so, a new long position is opened. Stop-loss orders are placed beneath the channel, and profit targets are located above the channel.
#1 – Trade the Breakout
One method is to trade the breakout of the channel. This breakout can be to the upside, but also to the downside. This setup is going to be the toughest of the three to trade, due to the false breakouts which occur in the market at a high frequency.
Breakout to the Upside
A breakout to the upside means there is a possible shift from a bearish sentiment to bullish. This strategy will have you buying the break above the channel. It’s recommended that buying into this break should occur after multiple tests of the upper channel line. Reason being breakouts early on in the channel often lead to traps as shorts push the price of the stock back down to the lower end of the channel.
#2- Short the Test of the Top of the Channel
Channels are better suited for traders that place trades within the range. The top of the channel is also known as the overbought territory for all of you Wyckoff traders out there.
This means that as a stock approaches the upper channel, there is a high probability of price returning inside of the channel.
For this strategy, you will place your sell order at the top of the channel and then cover your position as the stock moves in your favor. There is no guarantee the stock will make it all the way back to the support channel, so you need to be prepared for anything.
Also, the price action for stocks trading in channels is often slow and boring. Therefore the trading action will appear erratic at times as price marches to its own beat. This will give you a number of false signals, and head fakes as the action plays out within the channel.
This is why again it’s better to cover as things go in your favor and remember to exercise patience
#3 – Buy the Test of the Bottom of the Channel
Buying the test of the lower portion of the channel can get tricky. This is because you are knowingly buying a stock that is in a weak position. Therefore, you need to tread the waters with caution. That doesn’t mean you can’t take action but you have to be prepared that the stock may not bounce and could just ride the lower portion of the channel lower with no reaction back to the top line.
this trade will utilize number 3 gl guys…