Rectangle chart pattern definition
Rectangle Chart Pattern
A rectangle pattern occurs when the price of a security stays within a bounded range, creating horizontal trend lines that show well-defined support and resistance levels. Rectangle patterns show market indecision and indicate that the supply and demand of a security is in a stalemate.
Traders often watch for a breakout to occur either upwards or downwards. When price consolidates to a rectangle pattern during a downtrend, it is considered a bearish rectangle. A bullish rectangle is when the price consolidates during an upward trend.
How to trade using the rectangle chart pattern
To trade rectangle patterns, you can employ one of two strategies:
- Identify the levels of support and resistance, then buy at support and sell at resistance
- Wait for the price to break out either in an upward or downward trend and enter the trade in that direction
The second is the most common strategy, as after the breakout the price often moves several pips, giving you larger gains than if you were to trade within the rectangle. The most crucial element of trading a rectangle pattern is to identify the bounded support and resistance levels so you can react quickly once a breakout begins.