Posted in Finance, Accounting and Economics Terms, Total Reads: 594
Definition: Descending Channel
In technical analysis, descending channel or a downtrend is price action limited between two downward slopping parallel lines. This bearish pattern defined by trend lines supporting a series of lower high and lower lows is an exact opposite of ascending channel. The two parallel trend lines are drawn by the high prices of an assets and another by low prices of the assets. If the trend in price is downward, the space between the trend lines represents the downward channel.
It helps identify bearish trends and momentum of price change by its slope. If the prices remain within the trend line, investors expect the short term trend in prices to continue. While the investor may also believe in trend reversal and wait for the price to break the trend line resistance. It may be followed by complete trend reversal if the bullish indicators continue to exist. A higher high above the ascending channel indicates a trend change and a lower low below the descending channel would indicate continuation of the price trend. While a price break will generate a sell or a buy signal. If prices break downwards the stock appear bearish.
Each sell off that finds resistance at approximately the same percentage drop adds another element to the pattern. Trading with respect to descending channel would mean that the investor will look for short opportunities when the prices are at the top trend line. While the pattern also helps to suggest continuation or breaking of the price trend, the height of the channel indicates the price target. If the duration for channel formation is less than 3 weeks it is called a flag. Larger the duration more is the reliability for the channel.