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Rectangle Pattern Trend Forecasting in Financial Trading

This resource reveals how to predict market direction with Rectangle Chart Patterns.

 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.

The image showing the Bullish and Bearish Rectangle Patterns with breakout and breakdown.
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:

  1. 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.
  2. 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:

A trading example using the Bullish Rectangle pattern on the 4-hour chart of the NZD/USD pair.
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:

A trading example using the Bearish Rectangle pattern on the 4-hour chart of the EUR/GBP pair.
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.

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