What is a Descending Channel
A descending channel is used in technical analysis to show a downward trend in a security’s price series. It is formed from two negative sloping trendlines drawn above and below a price series.
BREAKING DOWN Descending Channel
A descending channel is one of many price channels that technical analysts will use to chart and evaluate the trends of a security. Overall, channels are used broadly across the investment market by technical analysts to follow the trends of securities over time. A channel is drawn from trendlines charted along the support and resistance levels of a security’s price series. In general, channels can be used to identify trading signals at both support and resistant levels for securities with moderate volatility and regular oscillations over time.
Descending Channel Indicators
Traders who believe a stock is likely to remain within its descending channel can make bets when the price fluctuates within its channel trendline boundaries. This type of trading strategy can be particularly successful when a trader has identified a reversal followed by a breakout series pattern. The reversal and breakout series can help to form the descending channel trendlines which can be extended for forward-looking insight.
Within a descending channel, a trader could make selling bets when the security price reaches its resistant trendline. Adversely, long buying trades could also be profitable when a security begins to reach its support trendline. These trading strategies can be beneficial when a stock has moderate volatility which keeps its trading constrained. Trading on channel analysis can also be profitable after a security’s price shows a reversal and breakout which is usually followed by a series of runaway gaps and an exhaustion gap all in the same channel direction.
An ascending channel is the opposite of a descending channel. Both ascending and descending channels are primary channels followed by technical analysts. In an ascending channel the trendlines would be positive sloping at the resistant and support levels.
Envelope channels are another popular channel formation that can incorporate both descending and ascending channel patterns. Envelope channels are typically used to chart and analyze a security’s price movement over a longer period of time. Trendlines can be based on moving averages or highs and lows over specified intervals. Envelope channels can use similar trading strategies to both descending and ascending channels. This analysis will typically be based on a stock price movement over an extended period of time while ascending and descending channels can be beneficial for charting a security’s price immediately after a reversal. (See also: Channeling: Charting A Path To Success)