The Rectangle pattern is a price pattern forming between the support and resistance levels. A rectangle is formed when the price reaches the same horizontal support and resistance levels multiple times. The price is confined to moving between the two horizontal levels, creating a rectangle. The pattern resembles a rectangular box, hence the name. The bullish rectangle is a continuation pattern that develops during a strong uptrend. Once the pattern is established, a break to the upside would imply a continuation of the bullish trend. The bearish rectangle is a continuation pattern that occurs when a price pauses during a strong downtrend and temporarily bounces between two parallel levels before the trend continues.
What is the Rectangle pattern?
In the Rectangle pattern, the price is constrained by support and resistance levels. This means observing the pattern on a chart, and traders need to look for a price between the two horizontal lines.
The Rectangle marks several highs and lows. These highs and lows indicate a period of consolidation. Also, there is an indecision in the market where buyers and sellers are competing with one another.
To identify the pattern, traders need to navigate it on either uptrend or downtrend. The price would then form several peaks and troughs. Finally, the breakout candle would confirm the direction of the trend.
This is what the Rectangle pattern looks like:
A keynote to remember is that the Rectangle can only be considered valid if the price is between support and resistance levels. If the price slides away from these levels, the pattern is deemed invalid.
Just like the Pennant pattern, the Rectangle depends on geometrical analysis and is a price continuation pattern. However, traders should not confuse the Pennant with Rectangle, as both have different body types.
How to use the Rectangle pattern?
For implementation, traders should familiarize themselves with Rectangle pattern variations; bullish and bearish.
a. Bullish Rectangle
The bullish pattern appears in an uptrend and signals continuation of a trend. For taking long positions, traders wait for the breakout candle. The entry points are set close to the Rectangle with stop-losses near the low of entry points.
b. Bearish Rectangle
The bearish Rectangle occurs in a downtrend and signifies trend continuation. Traders must take their short positions after the breakout candle. The entry points are present close to the Rectangle with stop-losses near the high of entry points.
After the formation of the bearish and bullish pattern, the price hurries its way above or below the Rectangle. The distance of this movement is similar to what was present before the establishment of the Rectangle. So, by calculating this distance, traders can set profit-targets.
For example, if the price of GBP/USD rises from 1.2780 to 1.2800, consolidates at 1.2790, breaks from the Rectangle at 1.2795, then profit-targets are 1.2780 + 1.2795 = 1.2875.
To make the Rectangle pattern more effective, traders could utilize it with momentum oscillators like the RSI or Moving Averages. This also can be confirmation of a trend reversal which the Rectangle can produce but no guarantee.
So, by using other technical analysis with the Rectangle, traders can help to identify the direction of the trend and take their positions accordingly.
Rectangle pattern trading strategy
The rectangle figure is a trading pattern which can appear during bullish and bearish trends. The pattern consists of tops and bottoms, which are parallel to one another. The other key point to illustrate is that the highs and lows are all horizontal.
Traders may look for the Rectangle pattern on any timeframe according to their own individual trading needs.
Remember that this trading system does not have a bullish or a bearish bias as they are neutral patterns when they form. Traders will not know which way it’s going to break until it does. But the high chance trade will always be in the direction of the current trend.
A confirmation candle that closes outside of the lower or upper bound shows an end to the rectangle formation and indicates the breakout direction of the continuing trend. Traders have to always know potential reversals in trend by looking at the general chart, which may show bigger macro patterns.
Rectangle pattern buy strategy
- Locate the pattern in an uptrend.
- Wait for the price bar to go bullish before entering.
- Enter after the appearance of a breakout candle.
- Place a stop-loss near the low of an entry point.
- Exit the trade before the trend reverses.
Rectangle pattern sell strategy
- Look for the pattern in a downtrend.
- Wait for the price bar to go bearish before entering.
- Enter after the occurrence of a breakout candle.
- Set a stop-loss near the high of an entry point.
- Exit the trade before the trend reverses.
Rectangle pattern conclusion
The Rectangle pattern is a useful price continuation pattern that gives entry and exit points. Besides this, it could become more operative when combined with other technical indicators. The Rectangle may only be considered valid if it is contained within support and resistance levels.
The Rectangle Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. One of the core assumptions that traders make when they regard the rectangle pattern as a continuation pattern, is that trends don’t go straight from point A to point B. In other words, the trend will not consist only of periods when the market advances or declines in the direction of the main trend, but also of pullbacks and consolidations.
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