Most of the articles on trading say that you will make a profit by trading with the trend. So when the market is not trending, can you make a profit? The answer is yes if you know the Rectangle pattern. Now let’s dig into the details of the pattern to see why it can make money when the market is moving sideways.
What is the Rectangle pattern?
The Rectangle is a price pattern that is formed when the price is trapped between 2 support and resistance levels. It is the most typical pattern for the consolidation phase of the current trend. It is also known as the pause in the fight between buyers and sellers when the market shows a consolidation in price before resuming the preceding trend. During this process, the price will “test” support and resistance levels several times before successfully breaking out.
Features of the Rectangle pattern
By structure, the Rectangle pattern will be “trapped” by the resistance and support zones. These two levels will create 2 parallel lines for the price to move within it. The price will not be able to break through. We will see the price fall when it hits resistance and bounce when it enters support. Therefore, the structure of this pattern will be different from the ones we introduced earlier. It has the main components below.
- Resistance line
- Support line
- Peaks or troughs circling in this zone
Market sentiment of the Rectangle pattern
From the features described above, it can be seen that the sentiments of the bulls (Buy) and the bears (Sell) remain in the locked price zone, which is completely balanced and neither side is superior. For better judgment, we look at the previous trend.
If it is an uptrend, the bulls are consolidating solid bullish momentum. The price will likely break the resistance line to continue going up. Conversely, if the previous trend is down, the price often breaks the support line to fall further.
How to trade the Rectangle pattern
To have a safe entry point with the Rectangle price pattern, we need to wait. When the price starts to break support/resistance, we will have 2 options.
Enter an order when the price has just broken out of the resistance or support level and closes the candle outside the rectangle. With this strategy, you will not miss any opportunity when encountering a Rectangle pattern. However, you will run a high risk of facing false breakouts. If you are not experienced enough to observe the market, you should enter an order when the price retests the newly crossed resistance zone. It’s a safe method for beginners.
Open a bullish order when the price breaks out of the resistance level. Set the stop-loss near the support level and the take-profit is double the price range of the rectangle.
Enter a bearish order when the price breaks out of the support level. Set the stop-loss at the resistance level and the take-profit is 2 times the price range from the resistance to the support line.
Answering some questions
Where does the rectangular pattern appear?
Based on the main trend of the market before forming the Rectangle pattern, we can divide them into 2 types, rectangular patterns at the peak and at the trough.
The pattern at the peak is formed after an uptrend and appears at the peak of that uptrend.
The pattern at the trough is formed after a downtrend and appears at the trough of that downtrend.
What is a standard Rectangle pattern?
The standard pattern is valid when it goes through at least 2 peaks, i.e. resistance and at least 2 troughs, i.e. support.
Is there a need to identify the previous trend with this pattern?
It is still best to identify the trend because this pattern is easy to be confused with the 3-top or 3-bottom pattern.
Above are all of our tutorials on the Rectangle pattern. I hope these guidelines will help you during trading. If you have any questions, feel free to leave a comment below. We will answer your questions as soon as possible.
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