Buying an asset in a downtrend can be a risky maneuver because most investors struggle to spot reversals and as the trend deepens traders take on deep losses. In instances like these, being able to spot descending channel patterns can help traders avoid buying in a bearish trend.
A “descending channel,” also known as a “bearish price channel” is formed by drawing two downward trendlines, parallel to each other, which confine the price action of the asset.
Descending channel basics
In a downtrend, the price action forms a series of lower highs and lower lows. A descending channel is drawn by joining the lower highs and the lower lows using parallel trendlines. The main trendline is drawn first where two or more lower highs are connected. Then a parallel line, also called the channel line, is drawn connecting the lower lows.
The price action inside a descending channel continues to move south as bears sell on any relief rallies to the main trendline.