Definitions
An ascending channel is the price action contained between upward sloping parallel lines. Higher highs and higher lows characterize this price pattern.
Investopedia
A descending channel is drawn by connecting the lower highs and lower lows of a security’s price with parallel trendlines to show a downward trend.
Investopedia
Easily Defining Uptrends and Downtrends
I like to use the drawing tools to make lines on my charts, particularly for defining ascending and descending channels (see chart above for an example of an ascending channel).
Basically, you find the lowest low on the left of a chart, and you draw a line from that point to touch the highest low. Then you draw a line from the highest low on the left to the highest high.
And, do keep things simple, just do the opposite when marking a descending channel. The highest high on the left will touch the lowest high on the right, and the highest low will touch the lowest low on the right.
A Descending Channel
The Purpose of Defining Channels?
First off, ascending and descending channels help a technical trader to visually study the steepness of a channel.
Secondly, it’ll be important to see if the price action of a stock will fall below this channel or above it, thus indicating a buy or a sell point.
If we have an ascending channel, and price action falls below the lower line (which also defines support levels), we could make a decision to sell the stock if we own it.
On the other hand, if we have a descending channel and the price action rises above the top line (which also defines resistance levels), we could make a decision to buy the stock.
In Summary
I use ascending and descending channels a lot in technical analysis. And I use them in various charts, from 20 day charts to 3 year charts. It’s just another tool that could be useful to the technical trader, but it’s not the only tool.
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