When you begin trading, you would want to avoid unnecessary risk and trade efficiently. Therefore, one must start learning the chart patterns, as they are easy to identify and trade with a better understanding of price action, allowing you to build a profitable strategy. They also help you identify the potential reversal and continuation in the price chart. One among those is the Descending Channel chart pattern.
In this article, we will understand the Descending Channel chart pattern, its structure, how to identify it, how to trade it with an example, its advantages, and disadvantages.
What is the Descending Channel Chart Pattern?
The Descending Channel pattern is primarily a continuation/consolidation pattern, but can act as a reversal if broken to the upside. The price moves within two parallel downward-sloping trendlines before a strong breakout or breakdown in an ongoing downtrend. Two parallel trendlines define the range of the price; the line above acts as a resistance line, and the line below acts as the support line in an ongoing downtrend.
Once this consolidation of the price is over, the price typically breaks down to begin a strong bearish trend, or price breaks out to begin a strong bullish trend after the pattern is formed.
The Descending Channel pattern appears when the price is making lower highs and lower lows over time, and the pattern can form over days, weeks, or even months, depending on the price action.
Structure:
- Parallel Trendlines: On the price chart, two trendlines are drawn in an ongoing downtrend.
- Upper trendline: The upper trendline slopes downward, connecting a series of lower highs.
- Lower trendline: The lower trendline slopes downward, connecting a series of lower lows.
For a valid pattern, the price should touch each trendline at least two times.
How to identify the Descending Channel chart pattern?
First, identify a security in a downtrend. Wait for the price to form lower highs and lower lows. Then draw two parallel trends connecting a series of lower highs and lower lows, and the upper trendline connecting lower highs acts as a strong resistance line, and the trendline connecting lower lows acts as a strong support line.
- Breakout Confirmation: The pattern breakout is confirmed after consolidation, as the bullish candle formed closes above the upper trendline of the pattern, indicating a reversal and a change in movement to a strong bullish trend.
- Breakdown Confirmation: The pattern breakdown is confirmed after consolidation, as the bearish candle formed closes below the lower trendline of the pattern, indicating continuation of the ongoing trend.
After the formation of the breakout or the breakdown candle, there is a rapid increase in volume, confirming the pattern formation.
How to trade the Descending Channel chart pattern?
Buy Signal:
Entry:
- Enter a long position in the security when the candle closes above the upper trendline of the pattern formed.
Stop-loss:
- At the low of the most recent swing bottom on the lower trendline, place the stop loss.
Target:
- Place the target by measuring the channel height and projecting it upward from the breakout point.
Target Price = Breakout Price + Height of the Channel
- Or as per your trading strategy, place your target according to your risk-reward ratio of 1:1, 1:2, or higher.
Example:
The chart below shows an example of “ Ambuja Cements Ltd” stock at a 1-hour timeframe from 18th February to 4th March 2025. You can see the buy signal generated by the Descending Channel chart pattern.
Sell Signal:
Entry:
- Enter a short position in the security when the candle closes below the lower trendline of the pattern formed.
Stop-loss:
- At the high of the most recent swing top on the upper trendline, place the stop loss.
Target:
- Place the target by measuring the channel height and projecting it downward from the breakout point.
Target Price = Breakout Price – Height of the Channel
- Or as per your trading strategy, place your target according to your risk-reward ratio of 1:1, 1:2, or higher.
Example:
The chart below shows an example of “Ambuja Cements Ltd” stock at a 1-hour timeframe from 29th December 2022 to 25th January 2023. You can see the sell signal generated by the Descending Channel chart pattern.
What are the advantages of the Descending Channel Chart Pattern?
- The Descending Channel provides a clear understanding of the price action and indicates clear entry, stop-loss, and target for everyone.
- The Descending Channel is versatile across all timeframes and all other security markets, as a single strategy, can be applicable for all markets.
- The Descending Channel pattern acts as a strong resistance level after the breakdown of the pattern.
- While trading the Descending pattern, the channel height helps in calculating target levels after a breakout or breakdown.
The disadvantages of the Descending Channel chart pattern:
- False breakouts can happen in a Descending Channel when the price moves below the trendline with low volume, only to quickly reverse, especially in low-volume or sideways market conditions.
- By the time the Descending Channel confirms, much of the move may have already happened.
- The Descending Channel often takes a long time to develop, especially on higher timeframes.
In Closing
In this article, we learned the Descending Channel chart pattern, its structure, how to identify it, how to trade it, along with an example, its advantages, and disadvantages.
The Descending Channel chart pattern is a powerful tool that signals potential reversals and continuation in the ongoing downtrend, indicating multiple opportunities for clear entry and exit signals.
Your profitability depends on your approach to the trade, your risk management, and your mindset when you are holding the trade, as no indicator or tool is 100% accurate, and as the Descending Channel chart pattern’s efficiency and accuracy increase rapidly when it is combined with additional indicators or tools (RSI, MACD, or others).
