Buying an asset in a downtrend could be a dangerous maneuver as a result of most traders wrestle to spot reversals and because the development deepens merchants tackle deep losses. In situations like these, having the ability to spot descending channel patterns may help merchants keep away from shopping for in a bearish development.
A “descending channel,” also called a “bearish price channel” is fashioned by drawing two downward trendlines, parallel to one another, which confine the value motion of the asset.
Descending channel fundamentals
In a downtrend, the value motion types a sequence of decrease highs and decrease lows. A descending channel is drawn by becoming a member of the decrease highs and the decrease lows utilizing parallel trendlines. The principal trendline is drawn first the place two or extra decrease highs are related. Then a parallel line, additionally referred to as the channel line, is drawn connecting the decrease lows.
The value motion inside a descending channel continues to transfer south as bears promote on any aid rallies to the principle trendline.
The asset in the chart above is in a downtrend, forming lower highs and lower lows. The main trendline is drawn by joining two lower highs (marked as ellipses) while the parallel channel line is drawn by joining the two reaction lows.
When the price reaches the channel line, bulls believe that the price has become attractive and they buy, but the bears are in no mood to allow the bulls to have their way. They sell when the price reaches the main trendline and the trend remains down.
The trading inside the channel is usually random but bound between the two parallel lines. A break below the channel indicates that the bearish momentum has picked up and that could result in a spike down.
Conversely, a breakout of the descending channel suggests a possible change in trend. Sometimes these breakouts result in a new uptrend, but on other occasions the price action forms a range before resuming the downtrend.
Descending channel breakouts
The chart above shows THETA token in a descending channel where the main trendline is formed by joining the two lower highs made on April 16 and May 9. The parallel line drawn from the reaction low on April 18 forms the channel line.
As seen above, the price action is largely caged between these two lines. The bulls pushed the price above the channel on June 17 but could not sustain the higher levels. The bears again quickly pulled the price back into the channel, trapping the aggressive bulls.
There were a few spikes below the channel line but the long tails on the candlesticks show that bulls used these dips to buy. This shows how the lines act as strong support and resistance.
Finally, the price broke above the channel on July 24 and after a minor consolidation, the recovery continued. This confirmed a legitimate breakout, indicating a possible trend change.
Monero (XMR) topped out on June 23, 2019, and then started a downtrend. The main trendline of the channel was formed by connecting the lower highs on July 8, 2019, and Aug. 8, 2019, while the channel line was drawn from the low on July 16, 2019. The XMR/USDT pair continued to trade inside the channel until Jan. 4, 2020.
The bulls pushed and closed the price above the channel on Jan. 5, 2020. This signaled a possible change in trend. The target objective can be arrived at by adding the height of the channel to the breakout level.
In the above case, the depth of the channel was $31.50. Adding this to the breakout level at $51.80, gave a target objective of $83.30. The pair easily exceeded the pattern target and turned down from $96.90 on Feb. 15, 2020.
This suggests that traders should use the target as a guide but decide on closing the position after analyzing other supportive indicators and patterns.
Descending channel breakdowns
Terra’s LUNA token topped out at $22.40 on March 21. Thereafter, it began trading inside a descending channel pattern. The bears pulled the value under the channel line on April 18 however they might not maintain the decrease ranges. The bulls pushed the value again into the channel on April 23 and trapped the aggressive bears.
The sellers once more broke under the channel line on May 19. Attempts by the bulls to push the value again into the channel failed on May 20 and May 21, confirming a legitimate breakdown. The pattern goal of the breakdown was $5.10 and the LUNA/USDT pair bottomed out at $3.91.
Take care to not combine up bull flags and descending channels
Bitcoin (BTC) rallied sharply from $17,572.33 on Dec. 11, 2020 to $41,950 on Jan. 8, 2021. Subsequently, the value corrected inside two parallel strains, which was a bullish flag pattern however might have been simply mistaken for a descending channel.
Thomas Bulkowski, writer of the guide Encyclopedia of Chart Patterns, says when a pattern is lower than three weeks lengthy, it’s a flag, however longer than that may be thought of as a channel.
In the above instance, the correction lasted for simply over three weeks and the value resumed its up-move after breaking out of the flag.
The views and opinions expressed listed below are solely these of the writer and do not essentially replicate the views of Cointelegraph.com. Every funding and trading transfer entails threat, it’s best to conduct your personal analysis when making a call.