In this post I’m covering the rectangle, another popular chart pattern used in technical analysis. The rectangle (also known as a trading range or box) can be a continuation or a reversal chart pattern as you will see shortly.
The Rectangle:
The rectangle is a chart pattern where price is bounded by two horizontal lines, a support line and a resistance line. Price moves back and forth between these two lines until it breaks either the support or the resistance indicating where it wants to go next. For a valid rectangle there must be at least two touches of each boundary. See pics below.
Rectangle as continuation of uptrend:
Rectangle as continuation of downtrend:
Rectangle as reversal of uptrend:
Rectangle as reversal of downtrend:
The touches of the two horizontal lines don’t have to be exact, “near-touches” is okay. This also means that the boundaries can have a slight slope to it. There is no predefined rule as to how price must move between the two boundaries, many times it’s irregular. What is important is two well defined boundaries with two touches / “near-touches” of each.
How can the Rectangle be Traded?
A rectangle can be traded between the boundaries, waiting for the breakout, or both.
If the trading range is large enough, many traders trade between the boundaries, that is buy at support and sell at resistance (waiting for some sort of confirmation is recommended here).
Another way is to wait for the breakout to occur and enter in that direction. Some traders will enter immediately after the break, while others will wait for a retest after the break before entering, or a combination of both. Each has its own pros and cons.
What about Targets?
In order to establish minimum price targets for the rectangle, measure the height of the rectangle and project this distance up from the resistance line if it is an upside breakout and down from the support line if price breaks down. See below:
Finally:
Remember that in technical analysis chart patterns – no matter how powerful – don’t always play out 100 %; they can and do fail. The rectangle – even though it’s very popular – is no exception.
Thanks so much for reading. Hope you and the family are well and safe.
Thanks and Regards,
Trading SOS SOS