Crypto Channel Trading: Three Patterns to Always Watch For
When it comes to crypto analysis, one of the best indicators to understand is the channel, defined as two parallel trend lines within a tight trading range. The upper line connects the price peaks in the channel while the lower line connects the price lows.
What’s nice is that such lines tell you when to buy and when to sell.
If your crypto hits the upper line without breaking higher, you sell.
When the stock hits the lower line without breaking through, you buy.
However, once the price breaks through the top or bottom line, the trend may be beginning to shift. It’s at this point where we want to watch for a new potential channel. But we need to make sure we’re not about to get trapped in false breakout.
To do so, we wait a couple of days to see if the trend is sustaining itself, or if it’s beginning to break apart. The last thing you want to do is get caught up in a false breakout because it’s a great way to lose money.
With channels, there are three to be aware of.
Learn How to Spot Unique and Predictable Patterns in Cryptos
No. 1 – The Ascending Channel
With the ascending channel, the price is contained between upward sloping lines with higher highs and higher lows along the way. For example, we can clearly see an ascending triangle in ChainLink (LINK) between early April 2018 and early May 2018 before the value of the coin broke below the trend line and fell into a descending channel.
No. 2 – The Descending Channel
With the descending channel, the price is contained between two downward sloping lines with lower highs and lower lows. We can see this with ChainLink (LINK) in May 2018.
No. 3 – The Consolidation Channel
The third is the consolidation phase, or the horizontal channel where the stock in question trades sideways in a tight pattern of highs and lows.
And then, of course, if the trend is broken to the upside or downside, we have a potential breakout. The idea is that once a stock begins to break above prior resistance points, the stock has the potential to trend even higher and that once traders learn about it, they pour in. But the key to trading a breakout successfully is by being early.
However, never buy just because of what the channel may be telling you.
Be sure to confirm with other indicators, such as your Bollinger Bands, MACD, relative strength, money flow, and even Williams’ %R. The last thing you want to do is getting caught up in a false breakout.
Another way to confirm if the break is real or not is with a change in volume.
Consulting volume for confirmation of breakout is essential to ensure changes in supply and demand. If the value of the coin begins to break higher, yet there’s not a lot of volume, we have to question the validity of the move.
Without it, we don’t know if the stock has simply gotten ahead of itself or if it’s actually breaking out at all. To spot a potential breakout candidate, find stocks that have a strong line of support and resistance.
Wait for the break to happen without trading the initial break higher.
Informed traders are the best traders.
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