What Is an Ascending Channel?
Let me explain what an ascending channel is: it's the price action that's contained between upward-sloping parallel lines. You'll see higher highs and higher lows defining this pattern. As a technical analyst, I construct an ascending channel by drawing a lower trend line that connects the swing lows, and an upper channel line that joins the swing highs.
The opposite of this pattern is the descending channel, which slopes downward instead.
Key Takeaways
- An ascending channel is used in technical analysis to show an uptrend in a security’s price.
- It is formed from two positive sloping trend lines drawn above and below a price series depicting resistance and support levels, respectively.
- Channels are used commonly in technical analysis to confirm trends and identify breakouts and reversals.
Understanding Ascending Channels
Within an ascending channel, the price doesn't always stay perfectly between the parallel lines; instead, it shows areas of support and resistance that you can use to set stop-loss orders and profit targets. If the price breaks out above the ascending channel, that can signal the uptrend continuing, while a breakdown below might indicate a trend change.
Ascending channels clearly define an uptrend, so you can swing trade between the support and resistance levels or trade in the direction of a breakout or breakdown.
Trading the Ascending Channel
When trading support and resistance, you could open a long position when a stock's price hits the ascending channel’s lower trend line and exit when it nears the upper channel line. Place a stop-loss order slightly below the lower trend line to avoid losses if the price reverses suddenly. Make sure there's enough distance between the parallel lines for a good risk/reward ratio—for instance, with a $5 stop, the channel width should be at least $10 for a 1:2 ratio.
For breakouts, consider buying when the price breaks above the upper channel line, but confirm it with other indicators like a volume increase and no overhead resistance on higher time frames.
For breakdowns, before shorting on a break below the lower line, check for weakness signs like price failing to hit the upper trend line or negative divergence in indicators such as the RSI, where price makes higher highs but the indicator shows lower highs, suggesting fading momentum.
Ascending Channel vs. Envelope Channels
Envelope channels are another common formation that can include both descending and ascending patterns. You typically use them to chart a security’s price over a longer period, while ascending and descending channels help with immediate analysis after a reversal. These trend lines might be based on moving averages or highs and lows over set intervals.
Examples of envelope channels include Bollinger Bands and Donchian Channels, which provide a broader view of price movements.
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