An ascending channel is a forex price pattern wherein there is a clear trend in the upward direction within the forex market. This pattern is formed when the value of one currency rises and the other falls then the new higher value becomes the new high while the lows also rise. Of course, it seems as if each step is higher than the next as if it was a staircase. This pattern helps traders to forecast the future changes in prices and therefore they make their decisions to open or close their deals.

How to Identify an Ascending Channel

The identification of an ascending channel requires one to look at a price chart over time. You’ll see two diagonal lines going up. The top one is the resistance line, which shows where prices struggle to go up, and the bottom one is the support line, where prices struggle to go down.

For instance, let us consider a stock quoted at $10, then it goes high up to $15, then it drops to $12, then it moves up to $18 before coming down to $14. Every rise is to a position higher than the previous one, and so is the case with every fall; making it an inclined line. What you do is link the highs and lows with straight lines to give an ascending channel.

Why Ascending Channels Matter in Forex

Traders enter these patterns because mechanical trading indicators can be derived from their development to show clear trading signals. Technical analysis of currencies in Forex is centered primarily on trends in prices of those currency pairs. An ascending channel can simply depict some price in currency that is on a steady rise and it may mean we can be able to make our profits.

If you can see this pattern at the early stage then one can tell when to get in a trade (buy) and when to get out (sell). The general concept revolves around the possibility of purchasing when the price has bottomed near the lower support line and selling when it rejoins back the upper resistance line. This way the traders aim to make their profits from the oscillating nature of the price containment within the channel.

Trading within an Ascending Channel

The approach that is used when trading in an ascending channel is quite straightforward most of the time. People wait for prices to drop to a support line, hoping they’ll rise again. It’s smart to sell when prices are near this line because they might not go up anymore.

However, it is not completely risk-free, albeit involving less risk than was the case with the preceding one. It is however important to understand that prices do not remain within the channel for the longest time. By this, there is always the possibility of a breakout of the price in the channel – upwards or downwards.

What Happens When the Channel Breaks

At times, the price will go below the tangent of the ascending channel as shown in the figure below. If the price goes above the resistance line, it means the market is getting stronger. Traders will buy more because they expect the price to go even higher.

But, if the price goes below the support line, it assumes a ‘Downward breakout’ which shows the reversing or weakness of the market. Some short-term traders identify this and enter the market for a fast sale thinking that the price will decline further.

Of course, any trader needs to understand how to act on a channel breakout since such a situation is capable of making or breaking your wallet.

Advantages and Limitations of an Ascending Channel

When trading with Ascending Channels, you can see how prices move. Prices bounce between two lines, helping you know when to buy or sell stocks. This is quite helpful for traders who prefer to rely on indicators patterns, and price movement.

That being the case, it should also be noted that like with any other indicator, there are plenty of disadvantages associated with ascending channels. No pattern is perfect. Such patterns do not always have to precisely follow the lines; where there are breaks in the market, breakouts occur. However, relying heavily on patterns alone and neglecting other variables such as news or economic reports can be rather dangerous.

An ascending channel helps traders, but they should be careful of surprises. Knowing its strengths and weaknesses helps them make smart choices in forex.