The fact that you are here on this page means that you are either a Forex or stock trader who wants to learn chart analysis and now wants to know more about the Rectangle Chart Pattern and trading the breakouts of this pattern. Chart analysis basics are the same. Therefore, what you learn in chart analysis can be applied to all markets. If you are new to chart analysis, I suggest you start from this article because it explains the basics of chart analysis that you must know before you want to learn about the chart patterns like Rectangles.
What Is the Rectangle Chart Pattern?
Rectangle is a kind of chart pattern, where the support and resistance lines of the pattern are parallel with each other.
All chart patterns form based on and by two lines: support and resistance
It is the support and resistance lines that form chart patterns like Rectangles, Triangles, etc. Each chart pattern has a support and resistance line. The way that the support and resistance lines get placed against each other on the charts determines the kind of chart pattern. In the rectangle chart pattern, support and resistance lines are parallel with each other, although rectangles can be ascending and descending that I will describe in detail in this article.
How to Locate the Rectangle Chart Patterns on Price Charts?
You must plot support and resistance lines on price charts, and then chart patterns like rectangle will show up. So, you should be skilled enough to see the support and resistance lines on the price charts to plot them.
Look at the above diagram. As you see, there is a resistance at the top and a support at bottom of each rectangle chart pattern. It can take a while to become skilled enough to see the highs to plot the resistance lines, and the lows to plot the support lines, to locate patterns like rectangles. When two support and resistance lines look parallel with each other, you have located a rectangle chart pattern. However, there are a lot of things you must know, before you use rectangle breakouts to trade because some novice traders usually think that they have found a chart pattern but they haven’t. They form the chart patterns mainly in their minds.
Let me give you some examples to enable you to locate the rectangle chart pattern easier. However, before you see the examples, I must explain that there are two kinds of rectangles when it comes to the markets’ conditions. If a rectangle chart pattern forms on a bull market or at the top of an uptrend, it is called a bullish rectangle. If it forms on a bear market or at the bottom of a downtrend, it is called a bearish rectangle.
When it comes to the angel of the rectangle chart pattern, there are three kinds of them. If the direction of the rectangle is up to down, it is called descending rectangle; and if it is down to up, it is ascending. If it is formed on a sideways market, then the rectangle is horizontal.
A Real Rectangle Chart Pattern
You see a beautiful and typical rectangle in the chart below. To plot each of the support and resistance lines, I’ve used two points that are marked as 1 and 2. Your job as a trader is to find these points and connect them to each other to have support and resistance lines on the chart. These lines are very important because markets react to them. When they are short and parallel with each other, you have a rectangle chart pattern that you can see on the chart below. If the lines you see on this chart were not parallel, then they would make a triangle, wedge or flag chart pattern. Are these patterns different when it comes to chart analysis and taking a position?
Well… there are some rules for each of them that novice traders try to memorize and take positions according to them. However, markets don’t care about these rules. They follow their own way. So, professional traders don’t trade based on the rules. They trade based on what the price tells them to. I will explain more to clarify this with examples, so that you know the mistakes and the misleading rules that cause most Forex or stock traders to lose. Just be patient and read this short article to the end.
Is Rectangle a Continuation or a Reversal Pattern/Signal?
There are two different things in this case. The first thing is what the rules say: A rectangle chart pattern that forms at the top of a bull market is a continuation pattern, and most probably the rectangle resistance will be broken and the upward movement will be continued. It is the same when it forms at the bottom of a bear market, which means when a rectangle forms at the bottom of a bear market, most probably the rectangle support will be broken and the price will keep on going down. This is what continuation means.
However, the real world is usually different from what these rules say: Rectangle chart pattern is not always a continuation pattern and the price can reverse when this chart pattern forms. You can see this in the above screenshot too. As you can see, the price that has been going up before the rectangle, it broke below the rectangle support line, went down and formed a strong downtrend.
Additionally, it doesn’t matter what kind of rectangle forms on the charts. Whether it is bullish, bearish, ascending or descending, a rectangle can be a continuation or a reversal pattern. It depends on what direction that breakout forms: On a bull market, if the price breaks above the rectangle resistance, then it will go up and the uptrend will be continued, and so the chart pattern works as a continuation pattern in this case. It is the other way round on a bear market, and so if the price breaks below the rectangle support, then it will go down and the downtrend will be continued, and so the chart pattern works as a continuation pattern in this case too.
However, like the above screenshot/chart, if the price breaks below the rectangle support line on a bull market, it will go down, and so the pattern works as a reversal pattern in this case. It is the same on a bear market.
Now let me show you more examples of what I have mentioned above.
In the below chart, there is a rectangle chart pattern that is formed after an upward movement. Then, the resistance of the rectangle becomes broken, and so the price goes up and forms a strong uptrend after two retesting attempts:
Rectangle False Breakout
In the below chart, there are two rectangle chart patterns. The first one has worked as a reversal pattern at the bottom of a strong downtrend. The second one has worked as a continuation pattern on the uptrend that was started after the first rectangle. There are two false breakouts in the below chart too, which means nothing is exact and precise in trading. That’s why you must always have a proper stop loss and you should not risk more than 2% of your account in each position (read this). When you enter after a false breakout, your stop loss will be triggered. However, you can enter again after a true breakout or during an accurate retesting of the broken line. In the below trade setups (resistance breakouts), you could easily take a 1:5 position or even higher. It means your profit could be at least five times larger than your stop loss. If you do so, you won’t care if your stop loss becomes triggered sometimes because not only do your winning trades recover your losses, but also they make a lot more profit as well.
As you see, the direction of the rectangle doesn’t matter at all too. It means, whether it is a ascending or descending, or even a bullish or bearish triangle, you must wait for a true breakout:
Rectangle and Head and Shoulders
In the below example, two rectangle chart patterns have formed the two shoulders of a Head and Shoulders pattern. Of course, this Head and Shoulders pattern is a little bigger and wider than usual, but it still looks like a Head and Shoulders. If you want to be after knowing the patterns, their names and related rules, you will lose money in trading. You should be after the strong trade setups. And, support/resistance breakouts are the strong trade setups, although sometimes you will lose because of the retesting of the broken support or resistance line, which is OK.
Losing is part of trading. As long as (1) you risk no more than 2% of your account, (2) you have a reasonable and relatively good success rate, and (3) your risk to reward ratio is at least 1:2 or better, you will always finish the month with a good profit. You should not be afraid of losing if you meet these three conditions. The first condition is completely under your control. You can determine your positions’ lot sizes in a way that you don’t lose more than 2% of your capital in each position. The other two have to be achieved and improved by learning and practicing (read this).
Therefore, in case of the below example, we could buy after the resistance breakout and retesting of the resistance, in the first rectangle chart pattern, and we could sell after the support breakout in the second rectangle. In both trade setups, your target size could be at least five times larger than the stop loss size. This is the only thing that matters. It doesn’t matter whether we have rectangles, Head and Shoulders, or both at the same time. It is the breakout that tells us what to do. Some traders try to overanalyze the markets and find too many lines and patterns that many of them are invalid. These traders lose all the time. You should keep the work simple, exactly as what you see in the chart below. There are just four lines there that two of them got broken. The first one is a resistance and the second one is a support breakout. It is as simple as this:
Rectangle Chart Pattern’s Length
Sometimes the length of chart patterns becomes too long. The question is, can you still know them as the same chart pattern? For example, when a rectangle becomes too long, can you still call it a rectangle?
We don’t have to call them anything. I mean, names don’t matter as I also explained this above. For me, patterns are not important. Support and resistance lines and the market reactions to them are important. You get in based on the support and resistance breakouts, not based on the name of the chart patterns or their length or direction.
In the below chart, you can see a too long rectangle chart pattern, but it doesn’t matter. You could easily buy after the rectangle resistance breakout:
The conclusion is that rectangle is a popular and frequent chart pattern that helps you take good positions. However, the good news is that you don’t have to memorize anything about this pattern and all other patterns if you want to trade Forex, stocks, metals and any other market. I have simplified it for you as you saw above. This is how I trade too. I don’t care about the patterns. I care about the support and resistance lines breakouts and the price actions, reactions and retesting. This not only will make your life much easier, but also it will increase your success rate, and it can even help you increase your profit and have a better risk to reward ratio in your trades.