Formation of Rectangle
This pattern is essentially a range price movement following a pronounced trend. At some point, the market begins to fluctuate in a sideways channel. When the price touches the upper and lower edges of the range (which become resistance and support levels) at least twice you can freely mark the pattern on your chart.
It is worth noting that the corridor edges should be horizontal. If they are tilted, then it is a Flag pattern. We will talk about it in another article.
Technical Analysis
The Rectangle gives a powerful signal to continue the trend. In this case, the figure works in both directions. If the Rectangle is formed after an uptrend, then after the signal is processed, the chart will continue to grow. On a bearish market, the price will continue to decline after the pattern is formed.
Rectangle Pattern
Why is this happening? When the momentum in the market weakens, the price starts moving in a range. At the same time, the opposite side doesn’t have enough strength to reverse the trend. When the price touches the corridor edges several times, it becomes clear that the market will not be able to reverse. After the completion of the formation of the Rectangle, the market will continue its momentum. This usually happens after an additional infusion of funds or the appearance of additional statistics.
How to Trade the Rectangle
This pattern is universal and suitable for any market - forex, indices, stocks. To trade the Rectangle, you need to remember a few things:
- This pattern fluctuates in a sideways channel but usually, this doesn’t last long. After several repeated touches of the corridor edges, the price breaks out and gives a signal to open a trade.
- If the Rectangle is formed on a bullish trend, then after the price breaks through the resistance, open a buy trade, since the price will continue to rise. After a downtrend, the chart breaks the lower edge (support) of the formed range and keeps moving down. At this point, you need to sell.
- The pattern can be considered valid only if the previous trend was strong. In this case, it will continue after the end of the figure formation.
- The Rectangle gives the most powerful signals on medium and high timeframes. Try to avoid trading this pattern on low timeframes.
- Scalpers and other high-frequency traders can trade within a range. However, this is not recommended due to the high level of risk. It is best to wait for the pattern to work out and open a trade depending on the further trend.
- After breaking through one of the sides of the Rectangle, the price often comes back for retesting. At this point, you can open a second trade to support the first one.
- Sometimes the price makes a false breakout. Wait for confirmation of further movement before opening a trade.
This is basic information on Rectangle. Since the market is essentially moving within a sideways channel, analysts often perceive it as a simple range. This causes the appearance of different views on Rectangle trading strategies. In the next article, I will tell you how world-famous traders prefer to trade this pattern.