The Secrets To Profitable Trades

A rectangle chart pattern is a straightforward yet powerful tool for traders looking to navigate the often volatile world of market trading.

This pattern, identified by its distinctive rectangular shape formed by price movements, serves as a key indicator of potential market trends and turning points.

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By understanding and effectively applying rectangle chart patterns, traders can better anticipate market movements, enhancing their decision-making process.

This article delves into the practical application of this pattern, providing insights into how it can be used to create effective trading strategies.

Through clear explanations and real examples, we aim to demystify this approach, making it accessible to traders of all levels.

Amazing Rectangle Chart Pattern Strategy

In today’s trading strategy tutorial, you’ll learn how the pros trade the rectangle chart pattern strategy. We also call this the rectangle trading strategy because it is one of the simplest technical price actions that you can trade.

You’ll learn everything you need to know about rectangle patterns, the psychology behind the rectangle pattern, buy and sell rules, and more. Before trading with real money, always do your own due diligence.

Our team at Trading Strategy Guides is launching a new series of articles called Chart Pattern Strategies, which will enhance and elevate your trading to a new level. These chart pattern strategies will give you a framework for methodically examining the fight between the bulls and the bears. This series has also been called the chart patterns cheat sheet.

By trading the most profitable chart patterns, you can determine who is winning the fight between the bulls and the bears.

This is a classical price action trading strategy that contains the price action between two horizontal lines that show significant support and resistance levels.

The beauty of this pattern is that it develops with the same frequency in all time frames. This means no matter your trading style, you can use these principles in your strategy.

Throughout this article, we will explain the requirements of a good setup and how to spot them. Furthermore, we’re also going to explain the psychology behind this accurate strategy that we will teach you today.

We will also provide you with a very clear step-by-step set of rules to trade the rectangle chart pattern Forex by yourself. 

Feel free to learn how currency pairs work in Forex.

Now…

Moving forward, we will discuss what makes a great setup and highlight five basic trading rules to conquer the markets with the rectangle chart pattern strategy. 

What Is the Rectangle Trading Pattern?

The rectangle strategy is both a continuation and a reversal trade signal. However, it’s more potent if used as a continuation pattern because the force of the trend is working for you. One thing to remember is that this is one of the best ways to begin trading Forex with a breakout strategy.

Keep in mind that this trading system doesn’t have a bullish or a bearish bias, as they are neutral patterns when they develop. You’re not going to know which way it will break until it does, but the high probability trade will always be in the direction of the prevailing trend.

How to Draw a Bearish Rectangle Pattern

There are two requirements that need to be satisfied to be able to draw the bearish rectangle formation:

• First, we need an established trend because big money is made when it’s used as a continuation pattern.
• Second, we need to have at least two equal (or near the same) lows and highs to draw two horizontal lines that should contain the price action.

This has a lot of striking similarities with the flag pattern, but the difference is that the price action moves flat and horizontally.

The Psychology Behind Rectangle Trading Pattern

The battle between the bulls and the bears is highlighted very well by the double-bottom reversal pattern.

Inside the rectangle trading pattern, a consolidation shows that no one is really in control of this market. Neither the bulls nor bears.

Our team at TSG likes the rectangle breakout strategy because we understand why it works. In other words, this method uses psychology in trading because you can see when other traders are in emotional and financial pain.

Retail traders’ main mistake is trading the consolidation price and placing their protective stop loss above/below. As more stops build up above/below the chart, these levels become more important for the institutional traders who need the liquidity provided by these orders to execute their big trades.

Now, let’s see how you can effectively trade with the pattern and make profits from using naked Forex charts.

How to Trade with the Rectangle Chart Pattern Strategy: Sell Rules

Now that you’re familiar with the rectangle price formation, let’s walk through an easy step-by-step guide that will allow you to skim the markets. This next section details the sell rules for the rectangle chart pattern trading strategy.

The wonderful thing about this particular method is that there’s a very easy way of knowing how high or how low it will send the currency price.

We will present you with an unorthodox approach to trading the rectangle breakout. This is a never-before-seen-trading technique that you can use at your disposal.

Let’s begin and dive into the Forex rectangle chart pattern step-by-step guide.

Step #1: Identify the Prevailing Trend Before the Rectangle Trading Pattern. For Sell Orders, We Need a Downtrend.

Just because you can spot this during rectangle pattern technical analysis, it doesn’t mean you have to jump straight into the market and trade it. Remember, we need the right context, and everything needs to line up for a tradable rectangle breakout.

So, the first step is to identify the market trend before the rectangle price formation. As we previously established for sell orders, we need to have a prior downtrend in place to begin developing a bias for a short position.

Establishing the phase of the market, a.k.a identifying the trend, is probably the biggest ingredient that can determine the success rate of the rectangle breakout.

Step #2: Identify the Rectangle Trading Pattern. The Price Action Needs to Move Horizontally Between Support and Resistance.

The second step is to identify the rectangle price formation by applying the previously mentioned rules.

All you need to do is spot one support and one resistance level that must contain the price action. Here, you can read the simple yet profitable strategy.

If you’re not already familiar with support and resistance zones, make sure to check out our other guides to help you learn more about Forex and trading in general.

Now, the secret sauce of this method is created by the rectangle false breakout, which is the next step to successfully trade the rectangle patterns Forex strategy.

Step #3: Wait for a False Breakout above the Rectangle Resistance Line.

We use a unique trade technique that allows us only to trade high-probability rectangles.

Usually, we want to see a break below support for a sell order to get an entry confirmation. However, before we get to this point, we also want to see a false breakout above the rectangle resistance line.

Why is the false breakout important to the rectangle chart pattern strategy? Well, the false breakout does two things:

1. First, it stops out traders who went short in the direction of the prevailing trend and places their stop above the most recent resistance level.
2. Second, it traps some buyers who take the resistance breakout trade.

These actions will fuel the downside momentum when the rectangle breakout happens.

So far, so good.

Now, we need to determine an entry technique to ensure we have the highest accuracy level possible.

Step #4: Sell at the Closing Candle That Generates the Rectangle Breakout.

After we identify the market trend and the characteristics of a good rectangle pattern design, we need to wait for confirmation that the trend is about to resume.

The rectangle breakout candle is our signal that the trend is about to resume, and it confirms and validates our entry position.

Rather than guess the direction, just wait and let the price activity tell you in which direction we will go. When trading with the rectangle chart pattern strategy, you’re looking for the opportunity to be a seller when you get a breakout below the rectangle bottom.

When the rectangle breakout happens, it is a confirmation that the bears have taken control of this market.

Note: We recommend waiting for the breakout candle to close below the rectangle chart pattern. You may also enjoy reading about the double-top pattern system.

Step #5: Take Profit Target Can Be 2-3x the Rectangle Price Range as Measured from Top Resistance to Bottom Support.

With this particular pattern, you can get a target for how high you can expect the price to go from the rectangle breakout.

According to the textbook, you can measure the distance between the two parallel lines and add that to the breakout to obtain your profit target.

The next important thing we need to establish is where to place your protective stop loss.

Step #6: Place the Protective Stop-loss Slightly above the Rectangle Resistance Level.

The system gives you a simple way to quantify risk by placing your protective stop-loss slightly above the rectangle pattern. Here is a strategy you can read about, and it’s called risk-to-reward ratio.

Furthermore, the rectangle trading platform also allows you to trade with a tight stop loss, which is great as we always want to keep losses at a minimum.

Note: The above was an example of a SELL trade. You can use the same rules, but in reverse, for a BUY trade. In the figure below, you can see an actual BUY trade example using the bullish rectangle pattern.

Conclusion: Rectangle Pattern Trading Strategy

The main reason why the rectangle top chart pattern is widely used and is so popular is that it’s easy to identify on a price chart. It’s also a real-time tool, whereas an indicator is lagging. This makes the rectangle pattern powerful in comparison with indicator trading.

Moreover, this pattern is slightly underrated, but we have done pretty well over the years trading the rectangle breakout.

Please also don’t forget to check out our previous strategy tutorial on double bottoms.

Thank you for reading!

Please leave a comment below if you have any questions about this rectangle chart pattern strategy!

Rectangle Chart Pattern Strategy Video

Rectangle Chart Pattern Strategy PDF Download

Elevate your trading skills with our comprehensive rectangle chart pattern PDF guide. This downloadable resource is packed with insightful examples and practical tips tailored to help both novice and experienced traders.

From understanding the basics to applying advanced techniques, this guide is your key to unlocking the full potential of rectangle chart patterns in various market scenarios.

Get your hands on this valuable tool and start making more informed, strategic trading decisions today. Download it now and transform your approach to market analysis.

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