A
rectangle is a pattern formed when price is bounded by parallel support and
resistance levels.
A
rectangle exhibits a period of consolidation or indecision between buyers and
sellers as they take turns throwing punches but neither has taken over.
The price
will "test" the support and resistance levels several times before
eventually breaking out. From there, the price could trend in the direction of
the breakout, whether it is to the upside or downside.
In the example above, we can clearly see that the pair was bounded
by two key price levels which are parallel to one another. We just have to wait
until one of these levels breaks and go along for the ride! Remember, when you
spot a rectangle: THINK OUTSIDE THE
BOX!
Bearish Rectangle
A bearish
rectangle is formed when the price consolidates for a while during a downtrend.
This happens because sellers probably need to pause and catch their breath
before taking the pair any lower.
In this
example, price broke the bottom of the rectangle and continued to shoot down.
If we had a short order just below the support level, we would have made a nice
profit on this trade.
Here's a
tip: Once the pair falls below the support, it tends to make a move that is
about the size of the pattern. In the example above, the pair moved beyond the
target so there would have been a chance to catch more pips!
Bullish Rectangle
Here's
another example of a rectangle, a bullish one this time. After an uptrend, the
price paused to consolidate for a bit. Can you guess where the price is headed
next?
If you
answered up, then you're right! Check out that nice upside breakout right
there!
Notice
how the price moved all the way up after breaking above the top of the
rectangle. If we had a long order on top of the resistance level, we would've
caught some pips on the trade!
Just like
in the bearish rectangle example, once the pair breaks, it will usually make a
move that's AT LEAST the size of its previous range.
