Rectangle Patterns
The Rectangle Pattern
A Rectangle is formed when the price moves between a support and resistance line several times, touching both on each occasion. These support and resistance lines are usually horizontal but may slope upward or downward, forming a channel. Regardless of whether the lines are horizontal or sloping; they must be parallel lines. The Rectangle is formed when the price moves up from a support line (1) to a resistance line (2), then back to the same support line (3) and finally back to the previous resistance line (4) where it bounces off to complete the fourth point in the Rectangle . A Rectangle can also be formed when the price moves from a resistance line to a support line, then back to the resistance line and finally back to the support line. Four is the minimum number of points required for a Rectangle , with two points touching the upper resistance line and two points touching the lower support line. If the price does not bounce off the fourth point, but breaks the channel line instead, then a Rectangle has not been formed.
Entry Signal
The ultimate entry signal for the Rectangle is the price breakout. When the price violates either the support line or the resistance line, trade in the direction of the breakout, with a protective stop loss just inside the Rectangle . A price breakout is validated when the volume increases at the breakout. The volume should be at least 33% to 50% higher at the breakout; otherwise it might be a false breakout.
You can also trade within the Rectangle . You could go long at the support line, with a protective stop loss just below the support line, and your price target at the resistance line. Or you could sell short at the resistance line, with a protective stop loss just above the resistance line, and your price target at the support line.
Price Projection
The height of the Rectangle is the price target when trading within the Rectangle and is the minimum price target when trading the breakout. When the price breaks out of the Rectangle pattern, take the height of the Rectangle and project it in the direction of the breakout. This is the minimum price projection. The maximum price projection is the width of the Rectangle from the first point to the breakout. The width is projected from the point of the breakout in the direction of the breakout.