Ascending channels give a steady signal about the strength of an upward trend and the best levels to open positions during pullbacks.
Trader use a variety of technical analysis tools to identify emerging trend and trade in that direction profitably. The price channel is a popular trend-defining pattern traders often rely upon.
A candlestick chart can be used to create an “ascending channel” or a “bullish channel”. It is created by drawing parallel lines connecting the support and resistance levels of assets.
Ascending channel basics
When the price action is contained within two parallel upward-sloping lines, an ascending channel can be formed. The first step is to join the reaction lows and draw the main trendline. A parallel line is then drawn connecting two reaction highs. This is the channel line.
The support zone is where the price reboundes, while the channel line acts like resistance where the price drops. The price moves between these lines in general. The ascending channel is bullish if the price continues to rise within the channel.
The chart below shows how the two reaction lows, marked as ellipses, can be combined to form the main trendline. Two points are ideal for the channel line. However, it is possible to draw a parallel line with only one reaction high for early identification.
As you can see, the price bounces off the main trendline but then turns down from below the channel line. This means traders will buy close to the main trendline, and then sell when it reaches the channel. Price action within the channel can be random and not follow a set pattern.
The channel is showing bullish signs as the price keeps rising. Because it is a low-risk entry option, traders use corrections to the main trendsline to buy.
A channel breakout signals bullish momentum. A break below the channel signifies a change in trend.
A break below the channel doesn’t always mean a downtrend. Sometimes, the price stays range-bound for several days before resuming the uptrend.