Pattern Key Features
The rectangle pattern is formed when the price of an asset trades within a relatively narrow range, with the upper and lower boundaries serving as resistance and support levels, respectively. These boundaries are often drawn as straight lines, creating a rectangle-like shape on the chart.
Sideways Price Movement
The price moves in a horizontal or sideways direction, with little or no clear trend. The upper boundary (resistance) and lower boundary (support) act as price ceilings and floors, respectively.
Support And Resistance Levels
The upper boundary represents a price level where selling pressure increases, preventing the price from moving higher. The lower boundary represents a price level where buying pressure increases, preventing the price from moving lower. Traders often draw these lines connecting multiple highs and lows to identify the boundaries of the pattern.
Duration
Rectangle patterns can last for varying durations, from a few days to several weeks or months, depending on the timeframe of the chart being analyzed.
Volume
During the formation of a rectangle pattern, trading volume is usually lower compared to periods of strong trends. Volume tends to contract as the price moves within the pattern.
Breakout
Eventually, the price is expected to break out of the rectangle pattern, indicating the end of the consolidation phase and the potential resumption of a trend. Breakouts can occur in either direction, with the price moving above the upper boundary (bullish breakout) or below the lower boundary (bearish breakout). Traders often look for an increase in volume accompanying the breakout as confirmation of the new trend direction.
Rectangle patterns are considered continuation patterns, suggesting that the price is likely to continue its previous trend once the breakout occurs. However, breakouts can also result in trend reversals, especially if accompanied by strong volume and price momentum.
Traders and investors use rectangle patterns to identify potential entry and exit points, set stop-loss orders, and gauge the overall market sentiment. They often combine the rectangle pattern analysis with other technical indicators or chart patterns to increase the probability of successful trades.
Have a look into our Combinations section to find possible combinations with our tools like Trend Bars Pro or the Swing Suite.