When the price is bordered by parallel support and resistance levels, a rectangle forms on the chart.
A rectangle represents a time of consolidation or hesitation between buyers and sellers as they trade punches but neither has dominated.
Before breaking out, the price will “test” the support and resistance levels multiple times. The price may then trend in the direction of the breakout, whether to the upside or downside.
The pair was clearly defined by two significant price levels that are parallel to one another in the example.
We just have to wait for one of these levels to break and enjoy the journey!
Bearish Rectangle
During a downtrend, a bearish rectangle forms when the price consolidates for a period of time. This occurs because sellers may need to take a breather before lowering the pair any further.
In this example, price broke through the bottom of the rectangle chart pattern and continued to fall.
We could have made a huge profit on this trade if we had placed a short order just below the support level.
Here’s a hint: When the pair goes below the support, it usually makes a move the size of the rectangular pattern.
In the previous example, the pair drifted beyond the objective, thus there was a possibility to grab more pips!
Bullish Rectangle
Here’s another rectangle chart pattern, this time a bullish rectangle.
Following an uptrend, the price paused for a brief period of consolidation. Can you predict where the price will go next?
If you answered up, then you’re right! Check out that nice upside breakout right there!
Take note of how the price rose all the way to the top of the rectangular pattern after breaking through it.
We may have profited from the trade if we had placed a long order above the resistance level!
As in the case of the bearish rectangle pattern, when the pair breaks, it usually makes a move that is AT LEAST the size of its prior range.
Next Lesson: Trading Bearish and Bullish Pennants
