When prices move back and forth within parallel support and resistance lines, the pattern formed is a rectangle.
The formation of a rectangle pattern indicates a period of price consolidation or indecision between buyers and sellers as both want to control the market but neither has the upper hand. The price will test the resistance and support levels of the rectangle several times before finally breaking out of the rectangle. After a breakout occurs, the price may continue to move in the direction of the breakout, which may be upward or downward.
We just need to wait for the price to break through one of the lines and then choose the entry direction. Remember, when you identify the formation of the rectangle pattern, please do not forget the moment when the price breaks through the pattern!
Bearish Rectangle
A bearish rectangle pattern is formed when the price consolidates for a short period during a downtrend. The reason for this pattern is that sellers may need to take a breather before pushing the price further down.
In this case, the price broke below the bottom of the rectangle and continued its previous decline. If we had set a short order below the support line of the rectangle, we could have made a nice profit on this trade.
We have a suggestion: once the price breaks the support line, the subsequent decline may be equal to the height of the rectangle. In the above example, the decline after breaking the support line exceeds the height of the rectangle, so there is an opportunity to capture more points this time.
Bullish Rectangle
Here is another type of rectangle pattern - a bullish rectangle. After a round of upward movement, the price movement pauses or experiences a short period of consolidation. Can you guess the direction the price will move next? If you answered up, then you are correct! The perfect upward breakout market appears here!
If you answered up, then you are correct! The perfect upside breakout is here!
Notice how the price moves after breaking through the top resistance of the rectangle. If we had placed a long order above the resistance line of the rectangle, we would have made some profit. As with the bearish rectangle, once the price breaks out of the pattern, it will move up by at least the same amount as the height of the rectangle.
