DEFINITION of Ascending Channel
An ascending channel is the price action contained between upward sloping parallel lines. Higher highs and higher lows characterize this price pattern. Technical analysts construct an ascending channel by drawing a lower trendline that connects the swing lows, and an upper channel line that joins the swing highs. The pattern’s opposite counterpart is the descending channel.
Ascending Channel Example
BREAKING DOWN Ascending Channel
Within an ascending channel, price does not always remain entirely contained within the pattern’s parallel lines but instead shows areas of support and resistance that traders can use to set stop-loss orders and profit targets. A breakout above an ascending channel can signal a continuation of the move higher, while a breakdown below an ascending channel can indicate a possible trend change.
Ascending channels show a clearly defined uptrend. Traders can swing trade between the pattern’s support and resistance levels or trade in the direction of a breakout or breakdown.
Trading the Ascending Channel
- Support and Resistance: Traders could open a long position when a stock's price reaches the ascending channel’s lower trendline and exit the trade when price nears the upper channel line. A stop-loss order should be placed slightly below the lower trendline to prevent losses if the security’s price abruptly reverses. Traders who use this strategy should ensure there is enough distance between the pattern’s parallel lines to set an adequate risk/reward ratio. For example, if a trader places a $5 stop, the width of the ascending channel should be a minimum $10 to allow for a 1:2 risk/reward ratio. (For more, see: Calculating Risk and Reward.)
- Breakouts: Traders could buy a stock when it’s 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 could require that a significant increase in volume accompanies the breakout and that there is no overhead resistance on higher timeframe charts.
- Breakdowns: Before traders take a short position when price breaks below the lower channel line of an ascending channel, they should look for other signs that show weakness in the pattern. Price failing to reach the upper trendline frequently is one such warning sign. Traders should also look for negative divergence between a popular indicator, such as the relative strength index (RSI), and price. For instance, if a stock’s price is making higher highs within the ascending channel, but the indicator is making lower highs, this suggests upward momentum is waning. (To learn more, see: What Does it Mean to Use Technical Divergence in Trading?)