How to trade ascending, descending and horizontal channel Patterns?

Today we are going to learn about Channel pattern

The channel is a powerful yet often overlooked chart pattern and combines several forms of technical analysis to provide traders with potential points for entering and exiting trades, as well as controlling risk. The first step is to learn how to identify channels. The next steps include determining where and when to enter a trade, where to place stop-loss orders, and where to take profits.

Channel Elements:

A channel occurs when the price of an asset is moving between two parallel trendlines.

1. Upper Trendline: The upper trendline connects the swing highsin price. If price breaks out of a trading channel to the upside, the move could indicate that the price will rally further.
2. Lower Trendline: The lower trendline connects the swing lows in price. If the price breaks below the bottom of the channel, on the other hand, the dip indicates that more selling could be on the way.
3. The channel can slant upward, downward, or sideways on the chart.

Types of Channels

A channel consists of at least four contact points because we need at least two lows to connect to each other and two highs to connect to each other. Generally speaking, there are three types of channels:

1. Channels that are angled up are called ascending channels.
2. Channels that are angled down are descending channels.
3. Ascending and descending channels are also called trend channels because the price is moving more dominantly in one direction.
4. Channels in which the trendlines are horizontal are called horizontal channels or rectangular trading ranges.

Buying or Shorting the Channel

• When the price hits the top of the channel, sell your existing long position and/or take a short position.
• When the price is in the middle of the channel, do nothing if you have no trades, or hold your current trades.
• When the price hits the bottom of the channel, cover your existing short position and/or take a long position.

Exceptions:

There are two exceptions to these rules:

• If the price breaks through the top or bottom of the channel, then the channel is no longer intact. Do not initiate any more trades until a new channel develops.
• If the price drifts between the channels for a prolonged period of time, a new narrower channel may be established. At this point, enter or exit near the extremes of the narrower channel.

Likewise, to avoid whipsaws, follow this approach.

• During a rising channel, focus on buying near the bottom of the channel and exiting near the top. Be wary of shorting since the trend is up.

• During a descending channel, focus on shorting near the top of the channel and exiting near the bottom. Be wary of initiating longs in a falling channel since the trend is down.

Significance of Volume:

• Volume is often lower in channels, especially near the middle of the channel. Breakouts are often associated with high volume. If the volume isn’t rising on a breakout, there is a greater likelihood the channel will continue.

Stop-Loss and Targets

Channels can provide built-in money-management capabilities in the form of stop-loss and target levels.

• If you have bought at the bottom of the channel, exit and take your profits at the top of the channel, but also set a stop-loss order slightly below the bottom of the channel, allowing room for regular volatility.
• If you have taken a short position at the top of the channel, exit and take profit at the bottom of the channel. Also, set a stop-loss order slightly above the top of the channel, allowing room for regular volatility.