Rectangle Pattern

Rectangles are continuation patterns that are created when price trades within a range during a pause in a longer term trend. Drawing rectangles requires a consolidation area with 2 roughly equivalent swing highs and 2 roughly equivalent swing lows. More touches at either trendline strengthen the likeliness of a rectangle pattern existing. The price level lines will form straight lines horizontally, giving the technical structure the appearance of a rectangle. You should also be able to use the rectangle tool to draw a rectangle over price action.

If the breakout occurs to the top, it triggers a long purchase. If the breakout occurs to the bottom it triggers a short sale. Stop loss placement is different from other patterns. Place the stop under a swing low retest of the rectangle’s top price line, or above a swing high retest of the rectangle’s bottom line. Placing the stop loss on the far side of the rectangle and scaling for maximum risk will likely result in such little gain it is not worth the trade.

Volume is typically highly variable during the rectangle pattern, but should expand after the breakout. If it does not rise after the breakout, it may be a false break.

Measure the height of the rectangle from the top to the bottom. Project the distance from the breakout point, upwards if it breaks out from the top, and down if it breaks out from the bottom.