Rectangles

A rectangle is a chart pattern where price moves sideways between two horizontal, parallel lines: a resistance level on top and a support level below. It is the formal chart pattern name for a trading range. Rectangles can be continuation patterns, pausing within a trend before it resumes, or reversal patterns, marking the end of a trend. Either way, they offer two kinds of trades: range trades inside the box and breakout trades when price leaves it.

Anatomy#

Continuation or reversal?#

Rectangles break in the direction of the prior trend somewhat more often, but not reliably enough to trade without confirmation. Volume behaviour during the range and the character of the tests can offer clues: for example, rallies to resistance on rising volume and dips to support on falling volume hint at accumulation. See Wyckoff Method.

Trading inside the rectangle#

• Buy near support, sell near resistance, with stops just beyond the lines.
• Wait for a reaction at the edges, such as a rejection candle, rather than buying blindly.
• Avoid the middle; reward and risk are both poor there.
• Target the opposite edge or the midpoint.

See Range Trading.

Trading the breakout#

1. Wait for a close beyond support or resistance, ideally with rising volume.
2. Enter on the close or on a retest of the broken line. See Role Reversal and Retests.
3. Stop back inside the rectangle, often near its midpoint or beyond the last swing.
4. Target using the measured move: the rectangle's height added to the breakout level (or subtracted, for a downside break).

False breakouts#

Rectangles are prone to false breaks: price pokes beyond a line, triggers stops and breakout orders, then returns inside. The longer and more obvious the rectangle, the more stops sit just outside it. Requiring a close beyond the line, volume confirmation or a retest helps filter these. A clear failure can be traded back towards the opposite edge. See Failed Breakouts and False Breaks.

Rectangles vs other patterns#

• With three clear tests of one edge followed by a break of the other, a rectangle can also be read as a triple top or bottom. See Triple Top and Triple Bottom.
• When the range is small and follows a sharp move, it is more like a flag. See Bull and Bear Flags.

Common mistakes#

• Expecting every touch to bounce after many tests have worn the level down.
• Trading breakouts on wicks.
• Ignoring the trend before the rectangle.

Frequently asked questions#

What is a rectangle pattern?#

A trading range where price moves between horizontal support and resistance, eventually breaking out in one direction.

Is a rectangle bullish or bearish?#

Neither by itself. It is a pause; the breakout direction, often the same as the prior trend, decides the outcome.

How do you calculate a rectangle target?#

Add the height of the rectangle to the breakout level for an upside break, or subtract it for a downside break.

Next, learn a popular bullish base: the Cup and Handle.