The Rectangle pattern is a price pattern forming between the support and resistance levels. The pattern resembles a rectangular box.
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
Traders may look for the Rectangle pattern on any timeframe according to their own individual trading needs.
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.
I would prefer to use the majority of candlestick patterns such as the Rectangle Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Rectangle Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Rectangle Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Rectangle Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.