Professional traders use this classic pattern to avoid buying in a downtrend
Buying an asset in a downtrend might be a dangerous transfer as most buyers wrestle to spot a reversal and when the pattern deepens, traders lose a lot. In such circumstances, recognizing a descending channel pattern can assist traders avoid buying in a downtrend.
A “descending channel”, also called a “bearish channel”, is shaped by drawing two parallel downtrend traces that restrict the motion in the price of the asset.
Descending channel bases
During a downtrend, price motion makes a sequence of decrease highs and decrease lows. A descending channel is drawn by combining decrease highs and decrease lows throughout parallel pattern traces. The fundamental pattern line is drawn first and has two or extra decrease highs related. Then a parallel line, additionally referred to as a channel line, is drawn via the decrease lows.
Price motion inside a descending channel continues to transfer south as bears promote to the principle pattern line on aid rallies.
Descending channel pattern | Source: TradingView
The asset in the graph above is in a downtrend, making decrease highs and decrease lows. The fundamental pattern line is drawn by connecting two decrease highs (denoted by an ellipse), whereas the parallel channel line is drawn by connecting two response lows.
When price hits the channel line, the bulls imagine the price has gotten enticing and purchase, however the bears are in no temper to give method. You promote when the price hits the principle pattern line and the downtrend resumes.
Trading inside the channel is often random however tied between two parallel traces. A break under the channel signifies that the draw back momentum is stronger and this could lead on to shock slumps.
Conversely, a breakout through the descending channel signifies a potential pattern reversal. Sometimes these breakouts lead to a new uptrend, however in different circumstances the price motion spreads out earlier than the downtrend resumes.
Breakout over the descending channel
THETA / USDT every day chart | Source: TradingView
The graph above reveals that THETA has been trading inside a descending channel since April, the place the principle trendline was shaped by the mix of two decrease highs from April sixteenth and May ninth. Parallels drawn from the response tray on April 18 type the channel line.
As might be seen above, price motion primarily strikes between these two traces. The bulls pushed price throughout the channel on June seventeenth however failed to maintain larger ranges. The bears rapidly pulled course again into the channel, capturing aggressive bulls.
There have been a few peaks under the canal line, however the lengthy wicks on the candles present that the cops used these drops to purchase. This reveals how sturdy the traces act as help and resistance.
Eventually the price broke out above the canal on July twenty fourth and after a small consolidation the rally resumed. This confirmed a legitimate breakout, suggesting that the pattern could have modified.
Daily XMR / USDT Chart | Source: TradingView
Monero (XMR) peaked on June 23, 2019 after which started a downward pattern. The channel’s fundamental pattern line is shaped by connecting the decrease highs of July 8, 2019 and August 8, 2019, whereas the channel line is drawn from the July 16, 2019 low. The XMR pair / USDT will proceed to trade inside the channel via January 4, 2020.
The bulls pushed and closed the price throughout the channel on Jan 5, 2020. This signaled a potential turnaround. The aim might be achieved by including the peak of the channel to the breakout degree.
In the above case, the peak of the channel is $ 31.50. Adding that to the breakout at $ 51.80 outcomes in a goal of $ 83.30. The pair barely exceeded the pattern’s goal, falling from $ 96.90 on February 15, 2020.
This means that traders ought to use the goal as a reference level, however the resolution to shut or maintain a trade needs to be made with the energy of the pattern and indicators from different indicators in thoughts.
Break under the descending canal
Daily LUNA / USDT chart | Source: TradingView
Terra (LUNA) peaked at $ 22.40 on March 21. After that, trading started in a descending channel. The bears pulled the price under the channel line on April 18th however failed to maintain the decrease ranges. The bulls pushed price again into the channel on April 23, holding the aggressive bears captive.
Sellers broke underneath the canal on May 19. The bulls tried to push the price again on the channel on May twentieth and twenty first however failed. This confirms a legitimate crash. The goal of the pattern is at $ 5.10 and the LUNA / USDT pair bottomed at $ 3.91.
Be cautious not to confuse between the rising flag and the descending channel
BTC / USDT every day chart | Source: TradingView
Bitcoin (BTC) rose from $ 17,572.33 on December 11, 2020 to $ 41,950 on January 8, 2021. The price then corrected inside two parallel traces, which is a bullish flag pattern however can simply be mistaken for a descending channel.
Thomas Bulkowski, creator of The Encyclopedia of Chart Patterns, called If a pattern lasts lower than three weeks it’s a flag, however a longer interval might be thought of a channel.
In the instance above, the correction took lower than three weeks and the price continued to rise after breaking over the flag.
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According to Cointelegraph