Trading 101: The Most Effective Ways of Trading the Channel Pattern

2021/10/14 10:12:18

Technical analysis is no doubt the best way to analyze and speculate the crypto market. And technical analysis in itself is an ocean of several types. Out of all, indicator-based, chart pattern-based, and price action are the most popular ways to perform technical analysis on charts.

It is a known fact that markets do not move in random directions. There are certain patterns in which all trading assets move. The price in the trajectory of a Channel is one such frequently occurring pattern. The Channel pattern not only helps in determining the flow of the market but provides potential predictions if comprehended in the right context.

The Channel Pattern

The Channel pattern is a design that appears on price-volume charts that are used to determine the possibility of trend continuation and trend reversal. The pattern is simply a range (sideways) market that is tilted. In fact, the behavior of a Channel pattern is the same as that of a Range. Though there are subtle differences with respect to their comprehension, the way to trade them remains the same.

Formation of the Channel Pattern

A trend is a sequence of higher highs/lower lows and higher lows/lower highs – where the market pushes in a particular direction, holds at the Support/Resistance, and continues with a subsequent push. In comparison, a range is a sequence of multiple equal higher and equal lows. But channel pattern, on the other hand, is a type of trend where the price does not hold at the Support/Resistance. In other words, the retracements are shallow in a trend and deeper in a Channel.

Types of Channel Pattern

Essentially, there are two types of Channel patterns based on the market trajectory.

Upward Channel

Upward Channel, also referred to as Bullish Channel, is one of the types where the market makes higher highs and higher lows, whose pullbacks go deeper and beneath the Resistance.

Significance

The pattern sequence of an upward channel signifies that the buyers are willing to buy the underlying asset at a higher and higher price. But, on the flip side, the retracements being deeper than a trend, it could also mean that the bulls are losing out of steam, and the market could reverse anytime soon.

Downward Channel

A downward channel is opposite to that of an upward channel. The downward Channel is made of a set of lower lows and lower highs where the price tests levels above the Support before proceeding south. Or in simple terms, it is a range that is slightly tilted to the downside.

Significance

With the price making lower low sequences, a bearish channel signifies pressure coming in from the sellers. It indicates that the low demand and increase in supply could drive the prices much lower in the subsequent trading sessions.

That being said, the retracements not reacting off from the Support to head south also signifies that the bulls are fighting back, but not as powerful as the bears.

How to Trade the Channel Pattern?

With a couple of interpretations on the channel pattern, it can be traded in anticipation of a trend continuation or trend reversal. The trend continuation trading methodology using the Channel pattern is based on buying/selling from the bottom/top of the Channel, while a trend reversal anticipation is based on the market breaking through the channel pattern.

Trading the Channel Pattern - Trend Continuation

From a design perspective, a channel is made up of a pair of parallel lines. If the Channel has been identified correctly, the price tends to bounce off from the lines and move in the other direction. Technically speaking, the bottom of the Channel acts as a Support, while the top of the Channel acts as a Resistance.

The basic yet effective method to trade the channel pattern is by buying it at the Support and shorting it at the Resistance. To ensure better accuracy and efficiency, it is logical to go long in an upward channel and short on a downward Channel.

In the Bitcoin price chart below, traders can go short from the Resistance of the Channel, as it is a bearish channel.

Downward Channel Formation on the Bitcoin chart - Source: BTC/USDT

Trading the Channel Pattern - Trend Reversal

A channel, when comprehended as the losing out of momentum, traders can look out for reversal opportunities. When the market breaks below the Support of an upward channel, it is an indication for a reversal to the downside. Conversely, the market breaking above the Resistance of a downward channel is an implication for a reversal to the north.

In the Litecoin price chart below, traders can go short when the price breaches below the Support of the upward Channel.

Upward Channel Formation on the Litecoin chart - Source: LTC/USDT

To recap, the channel pattern is basically a range pattern that is titled in either direction. Based on the trajectory of the price, channels can be of two types – bullish Channel and bearish Channel. The pattern can be used to participate in a trending market and accurately spot reversals as well. The frequent occurrence with multiple applications indeed makes the channel pattern a popular and reliable technical pattern in the cryptocurrency market. Make sure to follow the KuCoin Blog for more effective trading education.

Did you know that KuCoin offers premium TradingView charts to all of its clients? With this, you can step up your technical analysis and easily identify various trends, ranges and channel formations on the crypto price charts.