Guidelines to trade by using Rectangles

Guidelines to trade by using Rectangles

In a rectangle, price moves horizontally between overhead

resistance and underlying support


A breakout occurs when price closes outside the boundary of a chart pattern.

Touches There should be at least two touches of each trend line.

Trend lengths

A short-term trend lasts up to three months. An intermediate term

or secondary trend lasts between three and six months. A long-term trend or primary trend lasts longer than six months

Tops have price trending into a chart pattern from the bottom,

and bottoms have price trending into a chart pattern from the top

The price velocity leading to and exiting from a chart pattern are often similar even if the direction is reversed.

Undershoot or overshoot

Both undershoot and overshoot occur before a chart pattern begins. Undershoot happens when price briefly dips below

the entrance of a chart pattern. Overshoot happens when price briefly soars above it.

A rectangle forms because

traders want to own the stock at two fixed prices, one low and one

high, setting limits (for a time) on how far price moves.

Prices trend up to the formation and then

oscillate between two horizontal trend lines

before breaking out upward.

Measure rule

Measure the height of the rectangle from trend line to trend line.

For upward breakouts, add the height to the top trend line; for

downward breakouts, subtract it from the bottom trend line. The

result is the minimum expected move. For a maximum price

target, measure the length of the rectangle and extend it vertically

above the top trend line (for upward breakouts) or below the

bottom one (downward breakouts). The price becomes the

maximum expected move.

Wait before place forex trading signals for breakout Since you cannot be sure in which direction a rectangle will break

out, wait for prices to close outside the trend line before fx trading

in the direction of the breakout.

Tall rectangle scalp If the rectangle is tall enough, sell or sell short near the top trend

line and buy or cover near the bottom one.

Watch for rectangles forming as the corrective phase of a

measured move up formation and adjust the target price

accordingly. Rectangle reversals sometimes appear as flat top