Ascending channel – What is it, definition and concept | 2022

An ascending, growing, or bullish channel is a positively sloping price band that occurs when rising highs and lows occur within an upward movement.

Therefore, we are facing a situation of prolonged price increases. In this way, those two price lines, which represent the maximum and minimum of that period, would be the channel and help us to observe the market trend and serve as a stop in the fluctuation of said prices.

This technical analysis chart pattern is used by many traders. Of course, we must be attentive to possible ruptures, which we explain in the next section. In addition, a factor that affects its validity is the high volatility of the data and this must be taken into account.

Build an upstream channel

Building an ascending channel is relatively easy with trading platforms. In fact, most offer it as part of the analysis. Let’s see the construction process:

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  • First of all, you have to create the trend line, the lower one, which is based on the minimum prices of the analyzed period.
  • On the other hand, the upper one is the resistance, since the maximum prices would move within it, offering a top.
  • For this same reason, the bottom is called support and the reasoning is the same, but in relation to the minimum prices.
  • It is advisable to use, as support, the relative strength index (RSI), which measures a movement dynamics that, in addition, indicates the point of trend change. That is, a possible rupture.
  • Another indicator is the moving average convergence divergence (MACD), which is based on the moving average statistical methodology to watch for possible breakouts.
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breakups

They are those in which the prices are below or above the ascending or descending channel. You have to take into account the duration of this, because if it is something punctual, it is called a false breakout and it does not affect the upward trend of the market.

Therefore, as we have explained, the analysis of this channel must be accompanied by other indicators that make it possible to predict breakouts. Keep in mind that if they are prolonged, they allow an adequate investment strategy, which is not the case with false ones.

The ascending channel in trading

Let’s see an example with the evolution of a pair of currencies, dollar (USD) and euro (EUR). Next, we explain the situations that could occur in a certain period. Of course, it is a fictitious case, in order to clarify concepts.

  1. The first thing we did was create the support and resistance lines. In this way, we were able to verify that the market seemed bullish, in the example.
  2. At one point, the price fell below the minimum, but it is somewhat punctual. In this case we would be facing a false breakout. We should not take it into account.
  3. Then the opposite happens. Now the price is above the upper line and does so continuously. Here is a possible change in trend that we should see by complementing the ascending channel with the MACD and RSI indicators.

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