What are Rectangle Patterns?
Rectangle Patterns are the consolidation of price movements happening horizontally to form a rectangular shape.
Here, prices move up until a certain level is reached, then bounces back downwards to another level which upon reaching, it again bounces back to the top.
This process repeats several times to form a rectangular horizontal pattern on the price chart, also known as support and resistance levels.
By drawing Support and Resistance between the highest highs and lowest lows of the pattern, so many trading signals can be generated within and without the created patterns. This is because support and resistance levels tend not to be broken and so once reached, a reverse in price movement is most likely to occur.
Additionally, if the support levels are broken, then such a breakout or breakdown can also be another very profitable tradable signal.
In this article, we will focus mostly on establishing such rectangle patterns to trade breakouts and breakdowns on Olymp Trade. The other aspect of trading the pattern is already clear as mentioned above.
Trading Breakouts Using the Rectangle Pattern on Olymp Trade.
To trade Breakouts using this pattern, you need to be able to identify such a pattern as it forms to swing into action and draw your support and resistance levels. Once that is accomplished you can then keenly keep observing the charts to catch breakouts.
A breakout is where the price breaks the resistance level of the pattern and continues to rise further, providing a Buy trading opportunity that can generate a lot of profits. A breakdown, on the other hand, is where the price breaks the support level of the pattern and continues to fall further, providing a Sell signal. Both of these signals can occur in the rectangle pattern all alike.
Trade Breakouts and Breakdowns on Olymp Trade using the Rectangle pattern in the following quick steps;
- Identify consolidation of prices horizontally forming a rectangular pattern.
- Draw Support and Resistance lines of the pattern.
- Observe for Breakouts and Breakdowns.
- Enter Buy or Sell positions appropriately.
- Adjust your Stop loss.
- Adjust your Take Profit.
What if we deal with each step in detail so you can understand what needs to be done in each? You would like that, wouldn’t you? Let’s get going.
Identifying Rectangular Chart Patterns.
You need a keen observation of the price movements to catch the pattern. The pattern is not limited and can occur either on an Uptrend or a Downtrend. It can also occur at the beginning or end of a certain trend.
All you need to observe is price movement which establishes certain levels that tend not to be broken whenever the prices reach them. This will be the consolidation of the price into a rectangular-shaped pattern.
The rectangle is bound above by the level which has severally been the point of reversal if the price rises and bound below by the level which has severally been the point of reversal if the price falls.
Identifying this pattern will be the first stage towards a whole lot of exciting trading opportunities and signals.
Drawing Support and Resistance lines of the pattern.
You have already established price movements being consolidated between two specific levels, Support, and Resistance.
We said that the rectangular pattern will be bound above by the level where rising prices tend to reverse downwards. Draw a horizontal line along with that level because that will be your Resistance level.
We also mentioned that the rectangular pattern is bound below by the level where falling prices tend to reverse upwards. Draw another horizontal line along that level because that will be your Support level.
See the image above.
Observing for Breakouts and Breakdowns.
You have drawn your Support and Resistance levels and are now watching out for them to be broken upwards or downwards. Breakouts occur if prices break the resistance level while breakdowns occur if prices break the support level.
One thing you need to realize is that if either of the levels is broken, the price will most likely continue moving in the new direction. And if it does, it means the price momentum is strong enough to drive a strong significant move.
How to catch breakouts.
Assuming the rectangular chart pattern occurs not so long after an Uptrend began. This may mean that the Buyers just paused a little bit before taking the price further higher. Here, your breakout is expected to occur upwards.
If the rectangular chart pattern occurs not so long after a Downtrend began, it may mean that the Sellers just paused a little bit before taking the price further lower. You can guess towards which direction your breakout will be expected? Downwards.
What if the rectangular chart pattern occurs after considerably a long Uptrend?
Such may mean that the Buyers are kind of losing control of the market. If buyers are destabilized then Sellers take over. Your breakout here may be expected to occur downwards, in that case.
Conversely, if the rectangular chart pattern occurs after a significantly long Downtrend, then it may mean that the Sellers are losing it. This then will give the Buyers and upper hand only to have your breakout occurring upwards.
Now, here comes the question. How long is not so long or considerably long? You cannot tell, right?
In that case, I would rather you patiently wait for the breakout to occur wherever it pleases without being too quick to judge. Only be sure that a breakout will occur and once it occurs, whether upwards or downwards, you can trade.
Entering Buy or Sell Positions Appropriately.
This is the easiest thing to do considering you have already done most of the work in the previous steps. You only need to observe a breakout upwards and enter a Buy position. Conversely, a breakout downwards will prompt a Sell position and that will be all about the positions.
Remember that we said trading breakouts is not the only way for rectangle patterns. You can also trade within the rectangle using the support and resistance rules which I am sure you already know about.
Adjusting your Stop Loss.
For matters Stop Loss, it is always wise if it is not too far from the point of entry. This is for easy exit in case of fake outs. You can exit a trade early to look for other trading opportunities.
Place the Stop Loss just on the high of the breakout candlestick in a Sell position and on the low of the breakout candlestick in a Buy position.
Adjusting your Take Profit.
Here, you need to measure the height of your rectangle pattern. That means the distance between the support and resistance levels of the pattern.
After you have established such distance, place your Take Profit at the same distance from the point of entry. The reason we use the pattern height is that, after breakouts, the price mostly moves a distance not less than the height of the pattern. It may even move beyond such a distance which translates to more profits.
Wrapping Up on Rectangle Patterns.
There goes, an easy way to place profitable positions in Olymp Trade.