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Monday, February 18, 2008

ASCENDING CHANNEL PATTERN

Ascending Channel Pattern is a short-term bullish continuation pattern, whereby the price movement is contained within two parallel ascending trend lines and the price is moving higher while bouncing off upper and lower up-trending lines.
Ascending Channel pattern is also known as “Bullish Price Channel” or “Rising Channel”.

The Formation of Ascending Channel Pattern



Ascending Channel Pattern has two parallel trend lines that are sloping upward.
In this case, the ascending lower line acts as support, whereas the ascending upper line as resistance.

In general, Price Channel pattern has Main Trend Line (or Primary Trend Line) and Channel Line (or Secondary Trend Line).
The Main Trend Line is the one that determine the trend and slope of the price channel, while the Channel Line is the line that is drawn parallel to the Main Trend Line.

For Ascending Channel Pattern, the ascending lower line serves as Main Trend Line, and the ascending upper line as Channel Line.

To draw the Main Trend Line (ascending lower line), there should be at least two consecutively higher trough (low) points to be connected. These two troughs should have some distance. That means prices should drop and hit the rising lower line then bounce up for at least twice (forming at least two troughs).

Similarly, to draw the Channel Line (ascending upper line), there should be at least two consecutively higher peak (high) points to be connected. These two peaks should also have some distance. In other words, prices should increase and hit the rising upper line then decline for at least twice (forming at least two peaks).

These two up trending lines should be parallel or close to parallel, and they can be extended up as well.

In Ascending Channel pattern, the price should continue moving higher while bouncing off upper and lower trend lines, until a breakout occurs and either trend line is broken.

Therefore, one effective way to trade this pattern is by buying the stock on the lower trend line (support level) for short-term bounce plays.
Although it is possible to short sell the stock on the upper trend line (resistance level), this trade may carry more risk because one would be trading against the trend. And trading against the trend will usually be much riskier. (Remember the well-known trading phrase: "The Trend is Your Friend").

Breakout
The breakout from Ascending Channel pattern may happen to the upside (i.e. the price penetrates through the upper trend line) or to the downside (i.e. the price penetrates through the lower trend line).

As with the other patterns, the minimum penetration criteria for a breakout should be price closes outside either trend lines, not just an intraday penetration.

A breakout to the upside from Ascending Channel indicates that a buying intensity has increased, resulting in accelerated price increase. This provides a technical “Buy” (Bullish) signal.

A breakout to the downside indicates that the short-term uptrend might have come to an end, and it provides a technical “Sell” (Bearish) signal.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* FREE Trading Educational Resources You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

2 comments:

Anonymous said...

If a buyer and seller must be present to create a contract, which then creates 1 open interest, and subsequently 1 long position and 1 short position in the market, how can any futures market be net long or net short?

If for every buy there is a sale, how can a market ever be long or short? Wouldn’t the longs and shorts always be in perfect balance? So what does it mean when someone says, “..the market is massively short.”? Wouldn't the market be just as "massivley" long?

Thanks,

AC

OPTIONS TRADING BEGINNER said...

That depends on who are more aggressive and dominant in the market: buyers or sellers.

Although every seller needs a buyer as the counter party (and vice versa), but when the sellers are more aggressive, they will be the taking the initiatives and willing to sell at lower prices. Hence the prices will be falling.
And when sellers in the market are much more dominant than the buyers, it can be called "the market is massively short".