Hello Dear Readers!
Good day, good trading. This statement emphasizes an
important truth for traders. We know that good trading is based on technical
analysis. Technical analysis is a method that encompasses various tools and
elements. Among these elements, one of the most commonly heard and used is
chart patterns. Chart patterns are known to everyone as friendly tools for
traders, as they represent a specific pattern in price movements that repeats
in a certain order and are useful in predicting future price movements. In today's
article, we focus on one of these chart patterns, the "Rectangle" chart pattern.
What is the Rectangle Pattern?
There are many continuation patterns among chart patterns in
technical analysis. One of these patterns is the Rectangle Pattern. This
pattern initially causes a short pause in the trends in which it forms.
However, afterward, prices continue in the direction of the trend. For this
reason, it is known as a continuation pattern. In a bullish market, when it
appears, it's called a Bullish Rectangle, while in a bearish market, it's
recognized as a Bearish Rectangle. Regardless of the market type, prices trade
sideways for a period, indicating a period of indecision between buyers and
sellers.
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| The Rectangle Chart Patterns |
How does the Rectangle Pattern Form?
The Rectangle pattern forms as a result of the price moving
horizontally within a specific range. The upper line of this horizontal
movement is considered resistance, while the lower line is seen as support.
These horizontal lines are parallel to each other and resemble a rectangle
shape. Prices move up and down between these lines within a certain time
period, but they do not yet make a permanent move in one direction by breaking
the lines. We often
hear the names of these two elements more frequently in the Rectangle pattern:
- Upper (Top) Line: In reality, such a line does not physically exist on the price chart, it is only imaginary. In other words, we imagine it and can draw it using tools on platforms like MetaTrader or TradingView. Since prices within the rectangle can't cross this line upwards, we consider this line as the resistance level. So this resistance line represents the level where the price is struggling to move higher.
- Lower (Bottom) Line: Similarly, such clear lines are not actually present on the price chart, we draw them with our imagination. Or, we can draw them using charting tools on the platforms we use. Since prices cannot pass below this line within the rectangle, this line is considered a support level. A support line is a level where the price resists falling.
The Rectangle forms in an environment where the price moves
within a horizontal range for a specific period, and this range is tested
multiple times. This pattern usually occurs when the trading range narrows, and
prices become compressed. In some cases, this movement lasts longer than
expected, forming a horizontal trend.
How to Trade with the Rectangle Pattern?
The Rectangle pattern is a very simple and immediately
recognizable chart pattern on a price chart. When trading based on this
pattern, we either buy and sell as prices fluctuate between parallel lines.
This approach is more suitable for short-term traders and aligns with their
preferences. Alternatively, we can trade by waiting for a breakout, which is
preferred by medium to long-term traders. In this case, the trading strategy is
usually determined based on the direction of the breakout.
Trading with the Bullish
Rectangle Pattern
The Bullish Rectangle pattern forms within an upward trend.
In this pattern, the price exhibits horizontal movement for a certain period
and then breaks upward, continuing the uptrend. If the price surpasses the
upper line, this is considered an upward breakout, and buying can be done from
this level. Increased volume during the breakout can enhance the reliability of
the signal.
Entry (Buy): Buy orders are usually placed when the upper
line of the pattern is broken. However, some traders may also buy at points
where the upper line is tested and the price reverses. This means they can
place a buy order if the price breaks above the resistance level and then
retraces to use this level as support.
Stop-Loss: The stop loss level is typically set slightly
below the pattern's lower line or below the breakout point.
Target: The target level is placed above the resistance
level, equal to the height of the pattern (the distance between support and resistance). A distance of twice the height of the pattern can also be used.
Now, let's look at a trading example. In the following
chart, a trading example using the Bullish Rectangle pattern is presented on
the 4H (4-hour) chart of the New Zealand Dollar/US Dollar pair:
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| The Bullish Rectangle on the NZD/USD chart. |
Trading with the Bearish Rectangle Pattern
The Bearish Rectangle pattern is observed within a downward
trend. During this time, it is considered that the price may make a downward
break, and the price decline in the current trend may continue. If the price
falls below the lower line, this is considered a breakdown, and a sell order
can be placed. Before placing the sell order, confirmation from other
indicators can confirm the accuracy of this breakdown.
Entry (Sell): The selling point is usually considered as the
breakdown of the pattern's lower line. Besides, after the breakdown, if prices
test this level and then fall again, a sell order can be placed.
Stop Loss: The stop loss level is usually set slightly above
the upper line of the pattern or above the breakdown point.
Target: The target level is placed below the support level
identified during the pattern formation, and this level is measured by the
height of the pattern (the distance between the lower and upper lines). In some
cases, a distance of twice the height of the pattern can be used.
Now let's examine an example. The following image shows a
trading example with the Bearish Rectangle pattern on the 4H (4-hour) chart of
Euro/British Pound:
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| The Bearish Rectangle on the EUR/GBP chart. |
Important Reminder: The Forex market is known for its characteristics such as high volatility and liquidity, which also bring certain risks. Factors like instant price fluctuations and rapid reactions to news and global events can impact our trades. Chart patterns are not a definitive prediction tool and can give misleading signals when used alone. Therefore, they should be used in conjunction with other technical analysis tools, and a high level of sensitivity to risk management should be maintained.