Rectangle patterns are chart patterns that contain price movements and forms as a trading range between two price movements.
They are considered as a continuation pattern, but at times also can be a reversal pattern.
You need a minimum of four points to draw a rectangle: The upper line connects two rally tops, and the lower line connects two bottoms.
See the Chart below.
Chart by MetaStock
The upper line shows where bulls run out of steam; the lower line shows where bears become exhausted. So a rectangle shows that bulls and bears are evenly matched.
Rectangle patterns are also known as Trading Ranges, Consolidation Patterns, Flat Base and a Sideways Pattern.
Rectangles can can extend for a few weeks or many months.
For further in-depth information on stock market charts and stock chart patterns, check out this resource, which contains critical information to help you learn to use stock charts and technical indicators in a clear, simple and concise manner to improve your stock trading entries and exits.
Rectangles can be used for Breakout Trading or Swing Trading.
- Breakout Trading: If share volume swells when price approaches the upper border, an upside breakout is more likely. Visa Versa on the downside.
A valid breakout from a rectangle is confirmed by large increase in volume; one-third to one-half higher than the average of the previous five days. If volume is thin, it is likely to be a false breakout.
Confirm the breakout with the ADX indicator.
Most times there will be a pullback in price after the breakout.
- Swing Trade: When Swing Trading within a rectangle, buy at the lower boundary, and sell short at the upper boundary. The RSI indicator or Stochastic indicator will help you decide when to buy and sell.
The rectangle-pattern is simple strategy to use in your stock trading system!
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