Rectangle pattern

A rectangle pattern forms when a trend stops and price moves sideways between two levels. Sellers appear at the same high every time, buyers appear at the same low, and the candles fill a box. The pattern ends when a candle closes outside the box.

Rectangles are usually continuation patterns: price more often leaves the range in the direction it entered. A rectangle can also end a trend, in which case it works as a reversal pattern.

• Bullish rectangle – forms after a rise. Price rests in a range and then closes above resistance. The earlier uptrend is read as resuming.
• Bearish rectangle – forms after a decline. Price rests in a range and then closes below support. The earlier downtrend is read as resuming.
• The trend before the range only suggests the direction. The label is certain after the breakout, not before it.

• A trend before the range.
• At least two highs at about the same price and two lows at about the same price. More touches make the levels clearer.
• Both lines are flat. If the highs fall or the lows rise, the pattern is a triangle. If both lines tilt the same way, it is a channel or a flag.
• The range lasts. A rectangle usually takes weeks to months on a daily chart. A box of a few candles after a sharp move is a flag.
• Volume tends to fall inside the range and rise on the breakout.
• Mark the range with the rectangle tool or two horizontal lines. Small overshoots by wicks are normal; the levels are areas, not exact prices.

• Entry – on a candle that closes above resistance or below support. A more conservative entry waits for price to return to the broken level and hold it. See breakout trading.
• Stop – back inside the range. A common place is beyond the middle of the rectangle; a wider stop goes beyond its opposite side.
• Target – the height of the rectangle projected from the broken level. A range from 60 to 70 has a height of 10; a break above 70 gives a measured target of 80. It is an estimate, not a level price has to reach.
• False breakouts are common. A close back inside the range soon after the break is a reason to exit.

Some traders do not wait for the breakout. They buy near support and sell near resistance while the range holds, with a stop just outside the level and the opposite side of the range as the target. This works only in a tall rectangle, where the distance between the lines is several times larger than the stop.

Each new touch is a little less reliable than the one before, because every test uses up some of the orders that defend the level.

A rectangle with three touches of resistance looks exactly like a triple top until it breaks, and one with three touches of support looks like a triple bottom. The difference is the exit. A range after an uptrend that breaks down is called a triple top, a reversal. The same range breaking up is a bullish rectangle, a continuation.

• Entering on the first wick through a level – wait for the close.
• Drawing the box after two touches in total – it takes two highs and two lows to define a range.
• Trading the swings in a narrow range – costs and noise take the whole move.
• Assuming the direction of the breakout – the earlier trend has the advantage, but ranges break both ways.
• Ignoring the higher timeframe – a rectangle under strong resistance on a weekly chart can keep price boxed in for a long time.