Ascending Channel - Explained
What is an Ascending Channel?
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Table of ContentsWhat is an Ascending Channel?How Does an Ascending Channel Work?Trading the Ascending ChannelAcademics Research on Ascending Channel
What is an Ascending Channel?
An ascending channel is a type of trading channel. A trading channel is defined as a range within which price shifts. An ascending channel or rising channel can be defined as the upward movement of prices in between very accurate limits. These limits are known as the support level and the resistance level. An ascending channel is spotted in the chart when there is a bullish signal, i.e., the presence of higher highs and higher lows. In an ascending channel, there is a high tendency for the continuation of the bullish signal until it reaches a point where the lows fall below the previously documented higher lows.
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How Does an Ascending Channel Work?
In the ascending channel, entering short when prices are at the resistance level and entering long when prices are at the support level is the best way to take advantage of the upward trend. Although, the probability of gaining from the trade is higher when one goes long when the price is at the support level and happening in a trending market (high probability trades). Stop-loss orders and profit targets are set by traders with the resistance and support levels. The trend indicates a continuous upward movement when a breakout rises above an ascending channel. On the other hand, The trend indicates a likely change of trend when a breakout falls below an ascending channel.
Trading the Ascending Channel
- Support and resistance: When stock prices attain the channel's trendline, a long position can be opened by traders and closed when prices reach the channel's upper line. A good risk/reward ratio that ensures adequate spacing between parallel lines should be set by traders.
- Breakouts: When the price of a stock breaks above the channel's upper line, traders can decide to buy a stock. Breakouts are not accurate to be used alone. Hence, other technical indicators should be used alongside breakouts.
- Breakdowns: When prices break below the channel's lower line, it is advisable for traders to test for signs such as, the frequent falling of prices before reaching the upper trendline which might indicate a pattern weakness before taking a short position.