Ascending Channel Pattern: Individuals who trade in the stock market are always looking to make gains. One of the best ways of making these gains is by identifying the trend.
Analyzing market trends helps individuals make informed decisions about the time to buy or sell securities. And one of the essential tools that can help individuals to identify the trend is the ascending channel pattern
In this article, we will understand what is an ascending channel pattern and how individuals can trade with it.
What Is A Channel?
A channel is a type of chart pattern that helps you identify the current trend in the market. A channel pattern is formed by the combination of two lines that are parallel to each other.
The lows or the closing price of the security are connected to form the lower trendline and the highs or the closing prices of the security are connected to form the upper trendline.
These channels might slope upwards, downwards, or sideways based on which they are categorized into ascending, descending, and rectangle channel patterns.
These channels can also represent a change in the trend when the price of the securities breaks beyond the price of any of these channels. Here, we are going to specifically talk about ascending channel pattern.
What Is An Ascending Channel Pattern?
An ascending channel pattern is a type of chart pattern that appears during a bullish trend in the market. It is an upward-sloping channel that can be formed by connecting the higher highs and higher lows of the security price.
This pattern is also referred to as a rising channel pattern or an upward channel pattern. It is considered a bullish pattern as the buyers are pushing the price of the security gradually higher.
This pattern can also be considered a period of consolidation after which the security can give a breakout in an upward or downward direction.
Thus, this pattern can also be used for a bearish reversal, though it is primarily used for a bullish trend in the market.
How To Construct An Ascending Channel Pattern?
The formation of an ascending channel pattern requires security to form two highs and two lows that are subsequently higher than the previous price points.
The upper trendline is formed when you connect the two price points that form a higher high and extend the line further ahead in the chart.
The lower trendline is formed when you connect the two points that form higher lows and extend the line further ahead in the chart.
How To Trade Ascending Channel Pattern?
There are three in which you can trade ascending channel patterns. Here is a detailed explanation of trading the pattern in each way.
Trading With The Swing
In this trading strategy, you enter a trade when the price is moving inside the channel formation.
Here you can enter a long position when the price is near the lower trendline of the pattern and square off the position when the price starts reaching the upper trendline of the pattern.
The stop loss for this trade is below the lower trendline of the pattern which is acting as a support.
In a similar way, you can enter a short position when the price is near the upper trendline of the pattern and square off the position when the price starts reaching the lower line of the pattern.
The stop loss for this trade should be triggered above the upper line of the pattern which is acting as resistance.
Breakout On The Upside
Here you can enter a trade when the price of the security moves beyond the upper trendline of the pattern. The breakout indicates another strong wave of buyers entering the security.
When a security breaks above the upper trendline, you can enter a long position in the trade keeping the upper trendline as support and a trigger for stop loss.
The profit target for this pattern should be the same as the height of the channel.
Breakout On The Downside
Here you can enter a trade when the price of the security moves below the lower trendline of the pattern. The breakout on the downside indicates that the sellers have entered the security.
When the security moves below the lower trendline, you can enter a short position in the trade keeping the lower trendline as resistance and a trigger for stop loss.
The profit target for this pattern should be the same as the height of the channel.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
In this article, we discussed what are channels, what is an ascending channel pattern, how to construct the channel, and how to trade with it.
The ascending channel pattern is a versatile chart pattern that can help individuals gain in different ways in the market. But being reliant solely on the chart pattern to execute trades may not work in favor of the individual every time.
Thus individuals should also take the help of the technical indicators along with the pattern which can help them maximize their risks and minimize their losses.
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