Traders use this classic trading model to determine when to “buy on dips”


Traders use various technical analysis tools to identify emerging trends and make profitable transactions in that direction. A popular trend definition pattern that traders often rely on is called price channels.

The “rising channel” or “bullish price channel” is formed by drawing parallel lines between the perceived support and resistance levels of asset trading on the candlestick chart.

Basics of the ascending channel

When price action can be contained within two parallel upward sloping lines, an ascending channel is formed. First, draw the main trend line by connecting two reaction lows. Then draw a parallel line by connecting the two reaction high points. This line is called the channel line.

The main trend line is the support area for price rebound, and the channel line is the resistance to price decline. Usually, the price oscillates between these two lines. As prices continue to rebound within the channel, the ascending channel is considered bullish.

Ascending channel mode. source: Transaction view

In the graph above, two reaction lows (marked as ellipses) can merge to form a main trend line. Ideally, for the channel line, two points are needed, but in order to identify the channel early, it is also possible to draw a parallel line with only one reaction high point.

As shown above, the price rebounded from the main trend line and turned down from the channel line. This means that traders buy near the main trend line and sell when the price reaches the channel line. The price behavior within the channel may be random and does not follow any fixed pattern.

As the price continues to rise within the channel, it indicates that the trend is bullish. Traders use the correction to the main trend line to buy because it provides a low-risk entry opportunity.

The breakout channel indicates that bullish momentum is picking up, while the breakout channel indicates that the trend may change.

Breaking the channel does not always lead to a downtrend, because sometimes the price will remain range-bound for a few days and then resume the uptrend.

Ascending channel breakthrough

FTT/USDT daily chart. source: Transaction view

The FTX Token (FTT) chart shows an ascending channel in which the main trend line is drawn by connecting two reaction lows. The parallel line from the reaction high point is used to draw the channel line.

As shown in the figure above, from December 2019 to mid-December 2020, the price basically remained within the channel. By maintaining a closing stop loss, corrections that are close to or close to the main trend line can be used as low-risk buying opportunities.

Usually, a channel breakout indicates that the bullish momentum has picked up, but in this case, the two breakouts proved to be a bull trap. It closed above the channel line for the first time on August 30, 2020, and returned to the channel on September 3, 2020.

It closed above the channel again on November 30, 2020, failing to attract higher-level buyers, and the price re-entered the channel on December 1, 2020. This shows that there is no certainty in trading, so traders should always use stop losses to protect their positions.

Finally, in the third attempt, the price broke the channel on December 16, 2020, and the bulls defended the retest of the breakout level between December 20 and December 24. This means that the previous resistance has turned into support and the bullish momentum is about to pick up.

FTT/USDT daily chart. source: Transaction view

Breaking from the ascending channel, if it continues, it indicates that the momentum is picking up. This usually leads to a stronger rebound. The target goal can be calculated by adding the height of the channel to the breakthrough level.

In the above case, the height of the channel is $1.15. Adding this to the breakout level of $4.70 gives a target target of $5.85.

However, the rally turned vertical and quickly reached $10.10 on January 7, 2021. This means that the target should only be used as a guide, and other supporting indicators should be checked before closing a position.

Ascending channel failure

FTT/USDT daily chart. source: Transaction view

The FTT/USDT currency pair once again formed an ascending channel, and the price within the channel rose from approximately US$20 to US$63.10. After the big increase, the price fell below the channel on May 17. The bulls tried to push the price back into the channel on May 18 but failed.

This attracted strong selling and the currency pair began to fall. The depth of the channel is $14.90, and the breakdown occurs at $50.56. The target target obtained by subtracting the channel depth from the subdivision level is $35.66.

However, the downward trend continued, and the pair touched $21.89 on June 26. This shows that when the price breaks through the channel, traders should proceed with caution.

Not all failures will lead to a long-term downtrend

BTC/USDT daily chart. source: Transaction view

In the example above, Bitcoin (Bitcoin) Trading within the ascending channel from April 2020 to early June 2020. The price fell below the main trend line of the channel on June 11, 2020, but the BTC/USDT pair did not start a downward trend.

Instead, the price traded in a range for a few days and then resumed its upward trend. This shows that a break below the channel does not always lead to a downtrend. Traders should observe other supporting indicators and price movements before turning bearish.

Key points

The ascending channel implies the early stages of a strong uptrend, and it provides traders with an opportunity to buy the main trend line on dips.

Breaking the channel usually indicates a rebound in kinetic energy, leading to a sharp rebound. It is usually best to wait for the successful retest of the breakout level to open a new position, because sometimes the breakout proves to be a bull trap.

When the price falls below the channel, it indicates that the uptrend has ended, but this does not always lead to a downtrend. Sometimes, the price trades within a range after falling below the channel, and then as the trading volume increases, the asset starts to rise again.

Traders should combine the ascending channel with other technical tools to further understand their buying and selling decisions.

The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, and you should conduct your own research when making a decision.