How To Trade The Descending Channel Pattern (2024)

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Written by Arturo Ferracuti Reviewed by Shain Vernier

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Are you familiar with channel patterns? How about the descending channel pattern? In this article, we will teach you how to recognize, interpret, and trade this powerful chart formation.

Here is what you can find in this article.

What Is The Descending Channel Pattern?

The descending channel pattern is a bearish chart formation. It develops within pronounced downtrends in asset pricing.

Forex traders view descending channels as evidence of weakened strength in the counter currency. Accordingly, it is frequently used to sell a currency pair and join the prevailing market downtrend.

How To Identify the Descending Channel Pattern in Trading?

One of the biggest advantages of the descending channel chart pattern is its appearance. The pattern is readily discernable and consists of three parts: an upper channel line, a lower channel line, and a price channel.

Upper Channel Line

The upper channel line connects the upper bounds of price action. Essentially, it is an upper trend line that defines the top of a periodic trading range.

The upper channel line slopes downward. It represents a collection of lower highs, which indicates that a series of incremental price drops has taken place.

Lower Channel Line

The lower channel line connects the lower bounds of price action. It is a lower trend line that defines the bottom of a periodic trading range.

Like the upper line, the lower channel line also slopes downward. It connects a series of lower lows and indicates that an ongoing bearish trend is present.

Price Channel

The area between the upper channel line and the lower channel line is known as the price channel. It represents a series of price bars encapsulated by two parallel lines.

For the descending channel pattern, the price channel consists of a trading range that falls between parallel trend lines. Bearish price action is evident as the channel itself exhibits a downward trajectory. Due to these characteristics, the price channel is a bearish channel.

How To Trade the Descending Channel Patterns – Trading Strategies with Examples

Descending channels furnish the trader with a multitude of strategic options. Two of the most common are trend following and reversal breakout approaches.

Trend Following

As in the name, the descending channel suggests that a downtrend in price is evident. Thus, it can be a viable sell signal or queue to short the market with the prevailing trend. Because the trade is with the trend, a greater risk vs reward ratio may be applied.

To execute this strategy competently, you must use the channel to identify an optimal trade location. By entering a sell order from the upper bounds of the channel, one can secure short-side market exposure.

Trend Following Example

The GBP/USD chart above gives us a clear example of how to use the descending channel to short a market. Here is the process:

1. Identify and draw the channel.
2. Enter a sell limit order from just beneath the upper trend line at 1.2170.
3. Place a stop-loss order above the upper trend line at 1.2200.
4. Locate a profit target order at 1.2110 according to a 1:2 risk vs reward ratio.
5. Upon the profit target being hit, a 60-pip gain is realized.

Reversal Breakout

Contrary to trend-following strategies, descending channels may also be used to project a shift in a prevailing bearish trend. This is done by waiting to buy the market on price breaks above the channel’s upper extreme.

To trade reversal breakouts, you buy the market above the upper trend line. In doing so, a new long position is opened. Stop-loss orders are placed beneath the channel with profit targets located above the channel.

Reversal Breakout Example

The GBP/USD chart above illustrates the functionality of a reversal breakout trade. Below is the process by which this strategy is executed:

1. Identify and draw the descending channel.
2. Place a buy-stop or stop-limit order above the upper trendline at 1.2270.
3. Locate a stop-loss order beneath the channel at 1.2237.
4. Set a profit target above the channel at 1.2301, adhering to a slightly sub-1:1 risk vs reward ratio.
5. Upon the profit target being hit, a 31-pip profit is realized.

Descending Channels – Pros And Cons

Like any other technical analysis pattern, the descending channel has a collection of distinct pros and cons. Below are a few of the most important.

Here are the key takeaways from trading the Descending Channel pattern.

Frequently Asked Questions about the Descending Channel Pattern

Here are a few of the most frequently asked questions we receive on the descending channel pattern.

Is the descending channel a reliable trend-following indicator?

Yes. However, no indicator is 100% accurate. Proper risk management is advised when using the descending channel to trade trends.

When is it best to use a descending channel?

That is up to you! Descending channels appear in every market in every timeframe. They may be used to execute intraday, day, or swing strategies.

I am a momentum trader. Will the descending channel work with RSI or Stochastics?

Descending channels function well with a variety of indicators. This includes momentum oscillators such as RSI and Stochastics.

Risk Disclosure: The information provided in this article is not intended to give financial advice, recommend investments, guarantee profits, or shield you from losses. Our content is only for informational purposes and to help you understand the risks and complexity of these markets by providing objective analysis. Before trading, carefully consider your experience, financial goals, and risk tolerance. Trading involves significant potential for financial loss and isn't suitable for everyone.