Rectangle pattern is a trend-continuation chart pattern indicating the continuation of an existing trend after a period of consolidation. It is an easy-to-recognize chart pattern with (almost) equal highs and lows. Rectangle chart pattern resembles symmetrical triangle formation, another trend-continuation pattern.
The requirements of rectangle chart pattern include,
- There should be prior trend existing in the market. The trend shouldn’t be too mature; strong and extended prior trends provide lesser chances of trend continuation.
- To qualify as a rectangle pattern, there should be two relatively equal reaction highs and lows. The parallel line connecting reaction highs forms the upper resistance line and the line connecting reaction lows forms the lower support line.
- The breakout is confirmed when the price breaks out of the upper or lower line in the direction of the trend. For bullish breakouts the broken resistance level turns into potential support level, and vice versa.
- The volume is not so important with the pattern; but the breakout should be noticeable with increase in volume.
- The duration of the pattern can range from a few weeks to many months. Generally long-duration patterns are more reliable than short ones. If the pattern takes less than 3 weeks to develop, it is considered as a flag pattern.
Rectangle chart pattern forms as a result of strong competition between bulls and bears. After a strong trend, the prices begin to consolidate as bulls fail to make new highs exceeding the resistance level and bears fail to make new lows below support level. After a period of consolidation, breakout occurs, usually in the direction of the previous trend. Traders can enter trades after the confirmation of breakout; the immediate price target is the vertical height of the rectangle added/subtracted from the breakout point.
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