The upper line is identified first, as running along with the highs, and is called the trendline.
The lower line (the “channel line”) is identified as parallel to the trendline, running across the bottom.
When in the channel, prices are expected to bounce off both upper and lower boundaries. The more such reversals occur, the more reliable the pattern.
When the price is around the upper trend line, look for short opportunities, although aggressive traders could trade long and/or short at both trend lines looking for a bounce or pullback.
Another way to trade this pattern is to wait for the price to break through either trendline.
A break out above the upper trendline generates a strong buy signal, while a break down below the lower trendline generates a strong sell signal.
When the price breaks through the trend line (upper line), it might indicate a significant change in trend.
Breaking through the channel line (lower line), in contrast, suggests an acceleration of the existing trend.
Keep in mind that just like all the other patterns, channels might be prone to false or premature breakouts, which means that price may retreat back into the channel.
Descending channels are useful due to their ability to predict overall changes in trends.
Descending channels, like ascending channels, are a tool for determining whether the trend in price will continue.
As long as prices remain within the descending channel, the downward trend in price can be expected to continue.
Another strategy of using a descending channel is to identify where the price fails to reach the lower line.
The failure to reach it often signifies trend exhaustion. This could be an early warning that the trend is going to reverse. The breach of the trend line may be more likely to happen.
The direction of the break will determine whether it’s a continuation or a reversal.
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