T
he rectangle pattern is characterized by a pause in the trend, in which the price moves sideways between the parallel support and resistance zone.
Basically, it is developed from two lines passing through the tops and bottoms, which form the support and resistance, until the price breaks.
The model usually represents a consolidation in the price before continuing in the initial direction of the existing trend.
This consolidation comes from the indecision between bears and bulls, because none of them can prevail over the other.
What will happen is that the price will “test” the support and resistance levels a few times, but then it will finally break out whether it is to the upside or downside, depending on the direction of the breakout.
In the chart you will notice that the pair was “guarded” by two key price levels which are parallel to one another.
One of these levels is about to break out so you can prepare for a riding in a long trade.
As we said, the rectangle can be seen within an uptrend or downtrend. We will give you a few examples to outline these two scenarios, which represent a bull and bear rectangle, respectively.
Bearish Rectangle
Let’s start with the bearish rectangle. You will see a bearish rectangle formed in your chart when you have a downtrend and the price is consolidating for a while now.
This means that the sellers will pause the race just for a bit and when they gather their power again, they will take the pair lower, causing the breaking out.
In the chart above, you need to place your SHORT order below the bottom of the rectangle pattern and when the price breaks the support of this pattern, you will make some good profit, because it will continue its way further down.
Do you agree with us that you needed to go short, when you see the chart now? We hope so!
But there is one more thing that you should notice: At first the pair fell down as much as the size of the rectangle pattern. That would have been your target.
Then the price continued going down, so you could have caught even more pips.
Bullish Rectangle
This time our rectangle will be a bullish rectangle chart pattern.
You will see it on your chart when you have an uptrend, but the bulls paused to consolidate for a while.
You should expect that at some point the price will break out from the resistance level and it will continue its move up.
In this market situation, you need to enter a long trade on top of the resistance level and your target will be at least the size of the previous range.
If the price continues to move further way up, you could catch some more pips on the trade!
Traders should always be aware of potential reversals in the trend by analyzing the overall chart.
