How to Use Rectangle Chart Patterns to Trade Breakouts?2 min read
The rectangle is a classical technical analysis pattern recounted by horizontal lines showing significant support and resistance. It can be successfully traded by buying at support and selling at resistance or by waiting for a breakout from the formation and using the measuring principle.
The rectangle formation is an example of a “price pattern” in technical analysis. Price patterns derive from the work of Richard Schabaker, considered the father of technical analysis, and Edwards and Magee, who wrote what many consider the bible on the subject.
This period of technical analysis obtains from a time when charts were kept by hand on graph paper and even simple moving averages (SMA) had to be maintained by hand or with the use of a large, bulky adding machine.
Keep in mind that this trading system doesn’t have a bullish or a bearish bias as they’re neutral patterns once they develop. You’re not getting to know which way it’s getting to break until it does but, the high probability trade will always be within the direction of the prevailing trend.
The battle between the bulls and therefore the bears is highlighted by the double bottom reversal pattern alright .
Inside the rectangle trading pattern, there’s a consolidation that shows that nobody is basically on top of things of this market. Neither the bulls or bears.
The main mistake retail traders make is to trade the consolidation price and place their protective stop loss above/below. As more stops build-up above/below the chart, the more important these levels become for the institutional traders who need the liquidity provided by these orders to execute their big trades.