What Makes The Rectangle Chart Pattern So Important?| KOL Forex Analysis•Jay Tun

Did you know that the market is stuck in a range most of the time？ In other words, you will see the rectangle chart pattern 70% of the time. This leaves trends to form the other 30%. Hence it is important to know the significance of the rectangle chart pattern.

Cause

A rectangle occurring after a trend is normal. Rectangles are resting areas. This is an area where the bulls and bears are unable to overcome one another, resulting in a trendless situation.

Identifying The Rectangle Pattern

Given that rectangles are areas of rest, they should ideally be narrow and tight as shown in the chart below.

Did you notice that the horizontal lines of the rectangles act as support and resistance？

Prices may pierce through the support resistance lines, but the general rectangle pattern is still well respected.

Size

A rectangle can last for as short as a few minutes. Currency traders look for rectangles that last between minutes and days.

Besides varying in duration, rectangle chart patterns also vary in height.

A rectangle is like a base of a building. A larger base will be able to support a larger building. Therefore, a larger rectangle will be able to support a larger price move when prices move beyond the rectangle.

The larger the candles within the rectangle, the longer the pattern stays in a rectangle. The move following the breakout of the taller rectangle tends to be larger.

Compare the examples of USDJPY below.

The size of the above rectangle is 45 pips . Price hovered within the rectangle for 2 days and 6 hours before breaking out of the rectangle.

Lets look at a larger rectangle.

The size of the second example is 77 pips. It lasted for 13 days and 11 hours. See how much more powerful the down move is!

What Happens Inside The Rectangle？

Accumulation and distribution take place within rectangles.

At market lows, banks and large commercial companies will be accumulating (buying) the asset and this can occur within the rectangle pattern.

At market tops, banks and large commercial companies who had bought the currency pair while it was cheap will slowly distribute (sell) to uninformed speculators.

In short, rectangles are a battle between buyers and sellers.

You can find this pattern in all market types. How then, can we trade and profit from this rectangle pattern？

Show Me The Money

The old adage, the trend is your friend, is followed by many professional traders. Thus, to increase your profitability, you should trade after prices have broken out of the rectangle.

There are 2 ways to trade a breakout from rectangles:

#1 Breakout trade

· Watch for the price to break either the top or bottom of the rectangle.

· Enter a position according to the direction of the breakout

#2 Pullback trade

· Watch for the price to break either the top or bottom of the rectangle.

· Wait for the price to pull back to the area near the rectangle

Remember that the move following the breakout of a larger rectangle tends to be bigger？ Set your profit target according to the size of the rectangle.

Conclusion

Trendless price movement results in a rectangle chart pattern. We can be prepared for its next move and only enter a trade when prices have broken out of it.

「About The Author」

An independent trader who seeks to educate through his own trading

experiences, Jay began his own trading journey at the age of 22.

He is a self-taught trader who has read more than 200 books on

trading and investment since college and created his trading

methodologies modelling after several successful veteran traders.Jay has

since amassed 10 years of experience trading different market

conditions with consistency. Of the many disciplines in trading, he

specializes in trading options, swing trades on equities,

currencies,futures and contract-for-difference (CFDs).

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