Buying assets in a downtrend can be a risky operation, because most investors find it difficult to find a reversal, and as the trend deepens, traders bear serious losses. In this case, being able to find a downward channel pattern can help traders avoid buying in a bearish trend.
The “declining channel”, also known as the “bearish price channel”, is formed by drawing two parallel downward trend lines, which limit the price movement of the asset.
Downstream channel basics
In a downtrend, price movements form a series of lower highs and lower lows. Draw a descending channel by connecting lower highs and lower lows using parallel trend lines. The main trend line is drawn first where it connects two or more lower highs. Then draw a parallel line connecting the lower low points, also called the channel line.
The price action within the downtrend channel continues to move south, as bears sell on any rebound to the main trend line.
The assets in the above chart are in a downward trend, forming lower highs and lower lows. The main trend line is drawn by connecting two lower highs (marked as ellipses), while the parallel channel line is drawn by connecting two reaction lows.
When the price reaches the channel line, the bulls believe that the price has become attractive and buy, but the bears are not in the mood to let the bulls go with the flow. When the price reaches the main trend line and the trend remains declining, they sell.
Trades within the channel are usually random, but are bound by two parallel lines. A break below the channel indicates that the bearish momentum has picked up, which may lead to a decline.
Conversely, the break of the descending channel indicates that the trend may change. Sometimes these breakouts will lead to a new uptrend, but in other cases, the price action will form a range before the downtrend resumes.
Downward channel breakthrough
The above chart shows the THETA token in the descending channel, where the main trend line is formed by connecting the two lower highs formed on April 16 and May 9. The parallel line drawn from the reaction low on April 18 forms the channel line.
As mentioned above, the price movement is mainly between these two lines. The bulls pushed the price above the channel on June 17, but were unable to maintain a higher level. The bears quickly pulled the price back into the channel again, trapping the aggressive bulls.
There are some peaks below the channel line, but the long tail on the candlestick indicates that the bulls are taking advantage of these dips to buy. This shows how lines act as strong support and resistance.
In the end, the price broke through the channel on July 24 and continued to recover after a slight consolidation. This confirms a legitimate breakthrough and indicates a possible trend change.
currency(XMR) Peaked on June 23, 2019, and then began to fall. The main trend line of the channel is formed by connecting the lower highs of July 8, 2019 and August 8, 2019, while the channel line is drawn from the low of July 16, 2019. The XMR/USDT currency pair will continue to be traded on the internal trading channel until January 4, 2020.
The bulls pushed the price higher and closed above the channel on January 5, 2020. This indicates that the trend may change. The goal can be reached by adding the height of the channel to the breakthrough level.
In the above case, the channel depth is $31.50. Add it to the breakout level of $51.80, with a target target of $83.30. The currency pair easily surpassed the model target and fell back from 96.90 USD on February 15, 2020.
This suggests that traders should use targets as guidance, but decide to close positions after analyzing other supporting indicators and patterns.
Downstream channel failure
Terra’s LUNA token reached a high of $22.40 on March 21. After that, it started trading in the descending channel mode. The bears pulled the price below the channel line on April 18, but they were unable to maintain a lower level. The bulls pushed the price back into the channel on April 23 and trapped the aggressive shorts.
On May 19th, sellers fell below the channel line again. Attempts by the bulls to push the price back into the channel failed on May 20 and May 21, confirming the effective segmentation. The segmented model target is US$5.10, and the LUNA/USDT currency pair bottomed out and rebounded to US$3.91.
Be careful not to confuse the bull market flag and the descending channel
Bitcoin (Bitcoin) From US$17,572.33 on December 11, 2020, to US$41,950 on January 8, 2021. Subsequently, the price corrected within two parallel lines. This is a bullish flag pattern, but it can easily be mistaken for a descending channel.
Thomas Bulkowski, author of the Encyclopedia of Chart Patterns, Say When a pattern is less than three weeks, it is a sign, but longer than it can be considered as a channel.
In the above example, the correction lasted more than three weeks, and the price resumed its rise after breaking through the mark.
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