Crypto investors often look into various indicators to guide their buying decisions. Although, among all the patterns, Ascending Channels are quite popular and heavily relied upon. Let’s take a look at what this classic indicator is about and why it’s so widely used by traders.
According to Investopedia, a channel is formed when the price of an asset is “moving between two parallel lines.” In the case of cryptocurrencies, these lines represent perceived support and resistance levels. Normally, the upper trendline reflects upswings in prices, whereas the downward trendline reflects “swing lows.” When the channel is angled upwards, it’s called an ascending channel, which signals higher highs and higher lows for an asset.
A breakout from the ascending channel indicates that an asset will continue to see price growth in the future. On the other side, a breakdown from the pattern shows that price trends are about to change.
However, assets don’t always abide by the trajectories set by price channels. For instance, the FTX token broke out from its ascending channel on two occasions in 2020. But both those events failed to materialize in a sustained bull run for the currency.
The first breakout was formed on Aug. 30, 2020, but price activity returned to the channel on Sept. 3, 2020. Data from TradingView suggests that something similar happened on Nov. 30, 2020, however, that event was also ignored by the market and prices returned to the ascending channel on Dec 1, 2020.
Ultimately, traders pushed prices past the channel on Dec.16, 2020, and successfully defended a retest of the breakout price from Dec. 20 and Dec. 24. Here, the height of the channel was $1.15 and the breakout level was at $4.70, which gives a price target of $5.85.
Interestingly, the actual rally turned out to be a vertical event and prices went as high as $10.10 in January 2021. This highlights that price targets should only be viewed as a guide. Traders must also pay attention to other indicators before closing their position.
Generally, a breakdown from the ascending channel is perceived to be a bearish indicator. But again, this rule does not always hold. Bitcoin price action from April 2020 to June 2020 is a good example to understand such events.
During the aforementioned period, the flagship crypto’s price broke below the main trendline of the channel. As per TradingView, the BTC/USDT pair was unaffected by the event. In fact, after trading inside the channel for a few days, the pair started to trade upwards.
Traders studying price channels to determine market sentiment should usually watch out for a few things.
While a breakout from the ascending channel suggests continued upward momentum, it’s important to wait for a retest of the breakout price before taking on fresh positions.
If the price of an asset has fallen below the ascending channel, it indicates that the ongoing bull run may be ending. But it does not automatically point to a pullback in prices.
Finally, traders need to combine the ascending channel with other technical indicators to arrive at more holistic decisions about their holdings.