What is an ascending channel?
An ascending channel is the price action contained between parallel lines that ascend. Higher highs and lows characterize this price model. Technical analysts build an ascending channel by drawing a lower trend line that connects the swing lows and an upper channel line that joins the swing lows.
The opposite counterpart of the model is the downlink.
Key points to remember
- An ascending channel is used in technical analysis to show an upward trend in the price of a security.
- It is made up of two positive slope trend lines drawn above and below a series of prices representing resistance and support levels respectively.
- Channels are commonly used in technical analysis to confirm trends and identify breaks and reversals.
Example of an ascending channel
Understanding the ascending channels
In an ascending channel, the price does not always remain entirely contained in the parallel lines of the model, but rather shows areas of support and resistance that traders can use to set stop loss orders and profit targets. A break above an ascending channel may signal a continuation of the upward movement, while a break below an ascending channel may indicate a possible trend change.
The ascending channels show a clearly defined upward trend. Traders can switch the trade between the support and resistance levels of the model or trade in the direction of a breakout or breakdown.
Trade the ascending channel
- Ssupport and resistance: Traders could open a long position when the price of a stock reaches the bottom trend line of the ascending channel and exit the trade when the price approaches the top channel line. A stop-loss order should be placed slightly below the lower trend line to avoid losses if the price of the security suddenly reverses. Traders using this strategy must ensure that there is enough distance between the parallel lines of the model to define an adequate risk / reward ratio. For example, if a trader places a stop at $ 5, the width of the ascending channel must be at least $ 10 to allow a risk / reward ratio of 1: 2.
- Escapes: Traders could buy a stock when its price breaks above the upper channel line of an ascending channel. It is prudent to use other technical indicators to confirm the breakout. For example, traders may demand that a significant increase in volume accompany the breakout and that there is no resistance to overhead on longer-term charts.
- failures: Before traders take a short position when prices break below the bottom channel line of an ascending channel, they should look for other signs that show a weakness in the model. One of these warning signs is the price that does not frequently reach the upper trend line. Traders should also look for a negative divergence between a popular indicator, such as the Relative Strength Index (RSI), and the price. For example, if the stock price peaks higher in the ascending channel, but the indicator peaks lower, it suggests that the upward momentum is decreasing.
Envelope channels are another popular channel formation that can incorporate both top and bottom channel models. Envelope channels are generally used to represent and analyze the price movements of a security over a longer period. Trend lines can be based on moving averages or highs and lows over specified intervals. Envelope channels can use trading strategies similar to top and bottom channels. This analysis will usually be based on a movement of stock prices over a long period of time, while the ascending and descending channels can be useful for tracing the price of a security immediately after a reversal.