“Rectangle” patterns are continuation patterns showing indecision in trader’s sentiment about bullish and bearish conditions. “Rectangle” patterns are reliable patterns and the direction of the breakout/breakdown is known prior to the rectangle formation. These patterns are continuous and follow in the same prior direction (Up or Down) after the pattern formation.

“Rectangle” formations are bound by two horizontal trend lines, where prices oscillate between the “highs” and “lows.” The prices must intersect these trend lines at least twice before a breakout or breakdown can result. The volume within the pattern is usually quiet and increases during the breakout/breakdown stages.

A trade setup occurs when a price closes outside the trend line after at least two penetrations on each side of the boundaries. Trades are entered on a follow-up bar at “high above the breakout bar or “low” below the breakdown bar.

Targets in “Rectangle” formations are based on the depth of the rectangle pattern. The pattern is reliable, and targets are usually set at 70 to 100% of the depth of rectangle from the trade entry.

Rectangle patterns fail when prices retrace in to the middle of the rectangle channel. Place a “stop” order just below/above the middle of the channel.

Trading Rectangle Patterns

Tradin Rectangle Pattern

The example above illustrates a “Rectangle” pattern from the S&P futures (ES) 15 minute chart. On January 30, ES traded in a tight rectangle channel with highs and lows bound by two parallel trend lines. On the following day, prices traded outside the trend channel suggesting a breakout at 1437. The prior direction before the Rectangle” formation was upside. A “long” trade is entered above the breakout bar. Targets are placed at the depth of the rectangle from the trade entry at 1440.5. A “stop” order was placed in the middle of the channel at 1433.

Trading Rectangle Patterns

The example above shows a “Rectangle” formation from the Exxon Mobile (XOM) daily chart. From late June 2005 to September 2005, XOM traded in a narrow range from $57.5 to $61 forming a “Rectangle” pattern formation. Late September 2005, XOM broke out of the upper trading channel and closed above $61. The trades are only entered in prior trend direction.

  1. Enter a “long” trade above the breakout bar at $6 1.
  2. The height of the “Rectangle” pattern is $3.5.
  3. Place a “stop” order below the midline of the “Rectangle” channel at $59.
  4. Target the height of the “Rectangle” pattern above the breakout at $64.