How to trade descending channel pattern

How to Trade Descending Channel Pattern

Learn how to trade the descending channel pattern.

It’s one of the commonest chart patterns you’ll come across in the crypto market.

This frequency of occurrence provides a greater opportunity to earn as you trade.

But there’s more to it!

The falling channel (as it is also called) can be used to design a simple trading strategy. New and advanced traders may find this strategy useful during technical analysis.

That’s because the pattern gives clear entry and exit signals once you’ve connected peaks with troughs. Hence, this is more of a trend channel trading.

Stick around as I show you how to trade the descending channel pattern.

What is a Descending Channel Pattern?

A descending channel pattern is a formation with two falling parallel lines.

The upper line of this pattern is the trendline (primary line) while the lower line is the channel line (secondary line).

As with most patterns, this channel is created due to price’s movement or consolidation within a zone.

The shape of the zone is a rectangle but with a downward slope.

It follows that the downward channel pattern has the following characteristics:

  • Lower highs and lower lows price structure.
  • Equal distance between the trendline and channel line.
  • A small width but long height.

Now read this carefully.

The falling channel is a consolidation pattern.

As such, volume tends to reduce as price is constricted within the formation.

A breakout of the channel leads to a sudden spike in volume.

But it’s important to note that this channel can be spotted on higher and lower timeframes.

It’ll act more as a consolidation pattern in lower timeframes but as a trading zone or range on higher timeframes.

The point is, this formation can be a retracement move in an uptrend or an impulse move in a downtrend.

You can also spot several patterns within it. Some of these are the double tops and bottoms, rising and falling wedges, and head & shoulders patterns.

Is Descending Channel Bullish or Bearish?

A descending channel is a bearish chart pattern.

However, falling prices tend to break out in an upward direction after a while.

This breakout in the opposite direction means the channel has served as a reversal pattern.

Read Also: How to Trade Descending Broadening Wedge Chart Pattern

Here’s another point to note:

The longer price trades within the channel, the more likely for a breakout to occur and the more powerful is the move outside the channel.

On the other hand, this channel can have a more bearish outcome. And that’s when there is a breakout in the same downward direction.

This results in a penetration of the channel’s line instead of the trendline. And that hints at high bearish momentum in the market.

In this case, the channel is a continuation pattern.

Study the Bitcoin/USDT 4-hour chart below. It shows a bearish breakout from a falling channel.

Bitcoin chart with descending channel pattern

How to Trade Descending Channel Pattern

This is probably the best section in this guide and you’ll do well to pay close attention to every detail.

Here’s how to trade the descending channel pattern:

  • Determine the trend.
  • Draw the channel line and trendline.
  • Trade with the trend.
  • Use your stop loss.
  • Trade the breakout.

I’ll break each of these elements down.

1. Determine the Trend:

The downward channel can act as a reversal or continuation pattern in various timeframes.

So it’s important to know the current trend on the timeframe you’re trading.

And once you do, you can then proceed to map out this pattern on your chart.

For instance, navigate to the 15-minutes Bitcoin chart and spot a short-term downtrend.

That would mean you’re taking intraday positions. You’ll be shorting from resistance to support since the trend is down.

You also have the option of navigating to the 4-hour Bitcoin chart. Here you’ll be swing trading.

The only difference is how long it’ll take the formation to grow and breakout.

As you may have already guessed, higher timeframe patterns take longer to form and breakout.

Nonetheless, the resulting price target is more extended than breakouts from lower timeframe patterns.

This Bitcoin 15-minutes chart shows how a downtrend can be identified. Pay attention to the highs and lows to determine the pattern they’re creating.

descending channel pattern in downtrend

2. Draw the Channel Line and Trendline:

Now that you know the prevailing trend, It’s time to connect the lows and highs with a trendline tool.

You could do this from TradingView, Tabtrader, Metatrader, or whichever is your trading platform.

It’s quite simple.

All you have to do is draw two lines that are vertically parallel to each other. There’s a parallel channel tool you can use to make your work easier.

The first level to draw is the highs (peak) of the trend and this gives you your upper trend line.

The second level to be drawn is the lows (trough) of the trend.

Now do not second guess. Simply drag and drop the tool on these peaks and troughs.

And in case a peak or trough protrudes by a margin out of the channel you’ve drawn, it’s totally fine.

As with support and resistance, your focus is where the most price action took place.

How to draw descending channel pattern

On TradingView you can proceed to enable the midsection of the parallel tool. The goal is to see when price is trading within the middle band of the channel.

The midsection could also serve as a zone for profit taking or making entries even though the reward is lower.

Study the Matic/USDT 4-hour chart below for better understanding.

Descending channel pattern on Matic/USDT chart

Here’s a bonus point:

You can spot descending channels early in a downtrend by doing the following:

  • Look out for the first lower high in an uptrend.
  • Next, wait for price to also form a lower low. This will give you two levels to work with.
  • Connect the preceding high to the lower high. Also, link the previous low and current lower low together.
  • Extend both lines and wait for price to show bullish or bearish signals at the key levels.

3. Trade with the Trend:

You’ve probably heard the ‘trade with the trend’ slogan as a crypto trader.

Now it’s time to put that to work.

You’ll be shorting from the trendline (resistance) to the channel’s line (support).

As price recoils from resistance, take a short.

But not so fast.

You need a confluence of bearish signals around this area of resistance.

These signals include bearish candlestick patterns like a shooting star, gravestone or long legged doji.

You may also come across bearish engulfing, dark cloud cover, and evening star.

Each of these patterns is your cue to take a short.

Note that some bearish patterns such as hanging man will require confirmation before a short is taken.

That aside, you could also look for buying opportunities using bullish candlesticks.

The Matic/USDT 4-hour chart shows bearish and bullish signals hinting at entries or exits.

descending channel pattern bullish or bearish

Another signal to go short is if the channel’s resistance is at the same region as your EMA.

Let’s say the EMA 50 is acting as a resistance and there has been no candle close above it. The Bitcoin/USDT 30-minute chart below is a good example of what I mean.

EMA 50 act as resistance in descending channel

Alternatively, you could decide to bet against the trend by trading against it. Note that this is often a more risky way to trade.

In this case, you’ll be longing at support and taking profit at resistance.

The only issue is if the downward pressure is extremely high, price may not visit the upper trendline before breaking down further.

A scenario like the one painted above makes using a stop loss very important.

4. Use Your Stop Loss:

A stop loss will give you peace of mind as you trade, which is why you should take it.

It’s even more important to use a stop if you didn’t start trading the falling channel early.

Late entry means you’ve already missed out on a good part of the move.

With that in mind, your stop should be placed a small distance away from resistance (below support for longs).

Try not to place it right at the resistance level or around a whole number.

That’s because these are the two major targets of a stop hunt.

Read Also: How to Trade Ascending Broadening Wedge Chart Pattern

Another way to do it is to use a mental stop since price may have a false break every now and then.

Your mental stop rule is to exit once there is a candle close above the trendline (or below the trendline for longs).

5. Trade the Breakout:

All the steps listed above are a guide on how to take trades within the descending channel.

But that’s not the only way to go about it.

You could wait for breakouts above or below the channel to make your entires.

Keep in mind that false breaks could occur. This is when a candle fails to close above or below the trendline and thus, retraces back into the trend. You get to see this by the wick or tail created.

There’s also the potential for a false breakout. This is when there are closes outside the channel on several candles only for price to retrace into the previous range.

In either scenario, you can mitigate your losses by:

  • Only taking trades where there has been a retest of the breached line.

Trader’s remorse often causes price to revisit previous support or resistance. Hence, you need to confirm that the penetrated level will hold before making entries.

On the other hand, always waiting for a retest could lead to missing out on good entries.

This is because not all breakouts will have an immediate retest. Price may extend for hours, days, or weeks before revisiting the levels.

Another risk management to employ is:

  • Place a stop loss below the support or resistance of the channel.

This stop can be below a pattern close to the channel.

Descending Channel Pattern Breakout

The descending channel pattern breakout direction is upwards.

That’s why if you’re shorting from the highs of the pattern to the lows, be wary of this breakout direction.

How can you determine the descending channel breakout direction early?

Here are simple steps that’ll guide you.

1. Price’s Failure to Hit the Channel Line:

A good way to tell price is about to break out soon is when it fails to hit the channel line (lower line).

This failure hints price is not as weak as it used to be since buyers are gradually taking charge.

Check the Ethereum/USDT 30-minute chart below for better insight.

How to trade descending channel pattern

2. Change in Structure:

Another way to know that floor prices have been hit within the channel is when you have a double bottom formation.

The same lows hint price’s structure is changing.

What was the structure? I’ll tell you!

It was a formation of lower highs coupled with lower lows.

But now we have the same lows which should make you pause and think. It’s ideal to take profit and wait to see if a higher high is created.

Note that you could also have patterns like the inverse head and shoulders hinting at the bottom.

And in this case, the structure would’ve changed from lower lows to higher lows.

Descending Channel Pattern Target

The descending channel pattern breakout price target often coincides with the extent of the move covered by the channel.

Therefore, you can determine the distance price will travel upon breakout by measuring the channel.

Replicate or transpose the measured length to forecast price movement.

You’ll have a movement from $2,800 to at least $2,881. Imagine if you’d longed at breakout!

How to trade descending channel pattern

It’s worth noting that price movements will be stalled by resistance levels within the channel.

And there are cases where the whole length of the channel may not be covered. This happens if the market is in an extended downtrend.

You could have a 25 to 50 percent retrace before price backs down again.

That being so, raise your stop at each resistance to ensure your open profit is protected.

Descending Channel Pattern Examples

Here are some descending channel examples.

1. Descending Channel in a Rising Channel:

It’s possible to find a descending channel in a rising channel and vice versa.

That’s because price moves in swing highs and lows.

And as such, a higher time frame swing high could have several swing highs and lows on the lower timeframe.

But don’t get confused.

Here’s what I mean in the ETH/USDT 6-hour chart below.

You’ll also notice an inverse head and shoulders pattern in the chart.

This formation gave rise to the first higher low in the channel. And that hinted price could breakout to continue its uptrend soon.

Generally, trading this channel means a short from $1,900 to $1,400. Give or take that’s good profit.

2. Descending Channel as Impulse Move in a Downtrend:

A downtrend consists of an impulse move to the downside and a corrective move to the upside.

This is a Bitcoin/USDT 1-day chart showing how the impulse move of the trend can be stucked in a channel. What’s interesting to note is that the trend in itself is a channel.

Frequently Asked Questions

1. What are the Different Types of Channel Patterns?

There are three main types of channel patterns.

And these are rising or ascending, falling or descending, and horizontal channels.

The naming of each of these formations reveals the direction they point to.

As such, a rising channel pattern has price making higher highs and higher lows at a constricted level.

A horizontal or rectangle channel pattern, on the other hand, is a long trading range or consolidation.

It can be likened to a sideways movement with no direction.

That’s because price has the same highs and lows in this range.

2. How Do You Use Parallel Channels?

Parallel channels can be traded from point A to point B.

Point A might be support and B resistance.

In a rising channel, you’ll look to buy from support and sell at resistance. Or for a Bitcoin futures trader, you’ll be longing at support to take profit at resistance.

The same holds for a horizontal channel.

Spot it out on an Ethereum, Matic, Binance Coin, Algo, or Solana chart and trade it accordingly.

3. What is a Bullish or Bearish Channel?

A bullish channel is a rising channel.

Price tends to ascend in this channel since it’s creating higher highs and lows.

Contrastingly, the bullish channel has a higher chance of breaking downwards. This gives the channel a bearish implication.

A bearish channel, on the other hand, is a falling channel.

Price descends from the channel in a lower high and lower low structure.

This type of channel has a bullish implication. It’s because the breakout direction is usually upwards.

4. Do Descending Channels Break Down?

Yes, descending channels can break down.

This might be due to the high volatility of the market thereby causing prices to move faster.

That should not come as a surprise since the market tanks faster than it ascends.

It also follows that a falling channel can yield even more bearish results.

5. What is the Difference Between Descending Channel and Bull Flag?

The difference between a descending channel and a bull flag is in how long both take to form.

A channel takes longer and as such has more price action.

A bull flag, in contrast, takes a shorter time to complete. It’s price taking a short rest before rallying or declining further.

This difference in consolidation time makes moves out of a channel more extended than that of a bull flag.

6. What is the Difference Between Descending Channel and Falling Wedge?

A rising channel has a trendline and channel line that slope at the same degree.

In contrast, the trendline of the rising wedge slopes faster than the upper line. This hints price is rising too fast and at a pace that is not sustainable.

Final Words

It’s important to master how to trade the descending channel pattern the right way.

That’s why the resource above has been detailed carefully to ensure you understand what this pattern entails.

But don’t stop there. Practice what you’ve learned every now to train your eyes to spot this pattern easily.

Being better at mapping out the peaks and troughs of the falling channel means you won’t miss out on key levels.

That could either save you lots of money or make you more.

So go out there and practice!

Leave a Reply

Your email address will not be published. Required fields are marked *