Perhaps you’re brand new to the world of Forex trading and looking for a simple yet profitable strategy to apply in your financial dealings to make thumping profits. If so, you’re at the right place.
First, you should know that there are a handful of critical concepts you need to understand in the world of forex. And one of the most important of these concepts is that there are numerous ways of making fat stacks of money from trading forex financial assets, with the descending channel chart pattern being one of the most straightforward strategies used by both novice and expert traders.
In this brief article, we’ll explain the descending channel pattern in more detail, including its implications, how to identify it while trading, what it means to investors and traders, how you can draw one, and finally, how to trade it to your advantage. So, without further ado, here’s everything you need to know about this trading pattern in order to make some serious profits.
What Is The Descending Channel Pattern In Forex?
If you are wondering what the descending channel chart pattern actually is, you should know that it’s a kind of channel in Forex trading in which two parallel trendlines are meeting each other within the lower lows, and lower highs of a price and together make for a bearish channel trend.
Or in other words, the descending channel breakout helps traders to identify bearish price trends and use them to their advantage. This price channel could be utilized as a trend continuance channel pattern or as a bearish trend reversal. Either way, it’s advisable to trade in the movement of the given trend.
Is It A Continuation Or Reversal Pattern?
Truth be told, the descending channel pattern can act as both a continuation and reversal chart pattern depending on some very important trading conditions.
For instance, if you decide to trade within the channel and in the ongoing direction of the trend then the descending channel pattern will act as a continuation chart pattern. Conversely, if you opt to trade the channel breakout then it will act as an entire reversal chart pattern.
However, you should always keep in mind that the most suitable method is certainly trade continuation within the channel pattern. Because trading only in the direction of trend filters may cause you to catch false breakouts.
In addition, another logic when trading within the descending channel pattern is that, after a breakout, as opposed to a trend reversal price, the price can move sideways as well. For that reason, we definitely advise you to always trade in the channel’s direction!
How Can You Identify It?
For one, the descending channel pattern is always directly proportionate to the given bearish price trend, that’s pretty evident. And as we already mentioned, each bearish trend actually brings the appearance of lower highs and lower lows within the price chart.
In that context, to successfully identify a good descending channel pattern, you should take note and go through the subsequent steps:
- The initial effort is to search for at least three or four lower lows on the chart. Afterward, pull a trendline intersecting the lows of the price chart.
- Then, duplicate the initial trendline and bring it into line to meet the previous lower highs on the chart.
- Finally, a new descending channel pattern will form. However, remember that the candlestick shouldn’t close the outside range of the channel.
How To Trade The Descending Channel Pattern Like A Pro?
The best way to trade the descending channel pattern is by utilizing a more extended timeframe analysis. Uncover a descending channel pattern on the more elevated timeframe and afterward trade it in the directive of a regular bearish trend. Put differently, it means that you should trade lower timeframe channels within more heightened ones.
Start A Sell Trade
After you confirm a descending channel pattern on a higher timeframe, you should draw an ascending channel on a lower timeframe. Then, you should keep looking for a breakout of ascending channels in a bearish trend and start a sell trade immediately.
Stop-Loss Level
Put a stop-loss order right exceeding the last high caused by the price on the lower timeframe.
Set Your Take-Profit Level
In addition, you should set the beginning price of ascending pattern to be your take-profit tier 1. Afterward, draw a new line on the descending channel on its lower timeframe and keep persevering the trade until a contrasting trendline appears. By pursuing this technique, your risk-reward proportion can significantly grow.
Risk Management
Finally, the lowest risk-reward ratio for your descending channel pattern should be 1:1. If the risk-reward ratio of your arrangement is less than 1:1, then you should linger for a full-price pullout behind a breakout.
Stay Aware Of False Breakouts In Descending Channels
In case you’re day trading, chances are that the descending channel patterns will materialize during the day. After all, a descending channel pattern needs time to develop.
The most significant challenge with this pattern is that midday trading is notoriously boring and difficult. And with the lack of activity comes the undesired risk of making a bone head move.
For that reason, as a day trader, you first need to decide whether chasing the descending channel pattern is something you want to do with your entire day and if it’s worth it. If you don’t feel like trading that day, keep in mind that it’s okay to just say no, shut down your computer, and avoid getting exposed to financial losses.
Final Words
The descending channel patterns are a common trading pattern in the forex market. So, if you’re looking to make some profitable trades in both the short and long run, you should master this trading technique and use it to your advantage.=
However, with this pattern, keep in mind that the bears are always in control, so if you go long, please tread lightly before you become proficient at trading the descending channel pattern.
