HOW TO TRADE RECTANGLECHART PATTERN

in-depth tutorial

BULLISH RECTANGLE EXPLAINED

BULLISH RECTANGLE ILLUSTRATION

Bullish "Rectangle" chart pattern illustration
Direction: Continuation
Type: Bullish
Occurrence: Medium
Common term: Medium - Long

BULLISH RECTANGLE PRICE ACTION STRUCTURE

  • In an uptrend, price action finds first resistance 1, where it reverses direction and goes downwards till finding first support 2.
  • Price action reverse direction from support 2 and goes upwards, till finding the second resistance 3 which will be around the same rate of first resistance 1.
  • Price action reverse direction from resistance 3 and goes downwards, till finding the second support 4 which will be around the same rate of first support 2.
  • The pattern is completed when price action reverse direction from the last touch to the lower horizontal support and goes upwards till it breaks the upper resistance at point 5.

NOTES ON BULLISH RECTANGLE

  • Before the breakout, 4 touches to the rectangle's upper and lower borders are the minimum for a valid pattern, more touches are acceptable.
  • After the breakout, retesting the rectangle's upper resistance that turned to support is highly possible.
  • The more common direction for the pattern is continuation, but that doesn't rule out the existence of reversal rectangles.
  • Volume usually increases when breaking or retesting the rectangle's upper border 5.
  • This pattern is commonly found on medium and long-term time-frames.

HOW TO TRADE BULLISH RECTANGLE

  • Trade entry: the pattern is traded after price action breaks the rectangle's upper border at point 5, either with an entry after the breakout, or after a -highly possible- retest to the breaking rate.
  • Take profit: identified by measuring the vertical distance between the rectangle's upper and lower borders, that measurement is then applied from the breakout point 5.
  • Stop loss: the rectangle's upper resistance which turned into support after the breakout.

BULLISH RECTANGLE REWARD:RISK

  • R:R will depend on the (entry rate - rectangle's upper border) distance, compared to (upper border - lower border) distance.
  • Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond that level to give the trade setup some room to breathe, and of-course calculations for position size and R:R should be done with respect to that rate.

BULLISH RECTANGLE REAL EXAMPLE

Real example for a bullish "Rectangle" chart pattern, using the daily chart of GBP/USD on Oanda's MT4 platform
Currency pair: GBP/USD
Timeframe: D1
Breakout: 27-Nov-2013
Platform: MT4
Broker: Oanda

BULLISH RECTANGLE FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the upper border at point 5
  • Take profit: 255.4 pips - usual measurement applied from point 5
  • Stop loss: 158.3 pips (R:R 1.613) - set at 14% of target measurement, beyond absolute SL

NOTES ON THIS TRADE SETUP

  • Price action retested the breakout rate and almost triggered stop loss.
  • We used rates of points 2 and 3 to identify the lower and upper borders.

BEARISH RECTANGLE EXPLAINED

BEARISH RECTANGLE ILLUSTRATION

Bearish "Rectangle" chart pattern illustration
Direction: Continuation
Type: Bearish
Occurrence: Medium
Common term: Medium - Long

BEARISH RECTANGLE PRICE ACTION STRUCTURE

  • In a downtrend, price action finds first resistance 1, where it reverses direction and goes upwards till finding first support 2.
  • Price action reverse direction from support 2 and goes downwards, till finding the second resistance 3 which will be around the same rate of first resistance 1.
  • Price action reverse direction from resistance 3 and goes upwards, till finding the second support 4 which will be around the same rate of first support 2.
  • The pattern is completed when price action reverse direction from the last touch to the upper horizontal support and goes downwards till it breaks the lower resistance at point 5.

BEARISH RECTANGLE REAL EXAMPLE

Real example for a bearish "Rectangle" chart pattern, using the daily chart of GBP/JPY on Oanda's MT4 platform
Currency pair: GBP/JPY
Timeframe: D1
Breakout: 18-Dec-2015
Platform: MT4
Broker: XM

BEARISH RECTANGLE FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the lower border at point 5
  • Take profit: 647.8 pips - usual measurement applied from point 5
  • Stop loss: 223.2 pips (R:R 2.902) - set at 14% of target measurement, beyond absolute SL

NOTES ON THIS TRADE SETUP

  • The candle right after the breakout candle closed extremely near to the rectangle's lower border and had a wick inside the pattern, thus the candle after that one was used to confirm the breakout.
  • We used rates of points 2 and 3 to identify the lower and upper borders.