The rectangle pattern is one of the most common and tradable chart patterns in technical analysis. Also known as a trading range or consolidation pattern, it offers multiple trading opportunities both within the range and on breakouts. In this guide, we will cover how to identify rectangles and trade them effectively.
What is a Rectangle Pattern?
A rectangle pattern forms when price moves sideways between horizontal support and resistance levels. The pattern creates a box-like formation where price bounces between a floor (support) and a ceiling (resistance).
Key characteristic: Unlike triangles that have converging trendlines, rectangle patterns have parallel horizontal lines. This creates a clear trading range that can last for weeks or even months before a breakout occurs.
How to Identify a Rectangle Pattern
To properly identify a rectangle pattern, look for these characteristics:
- Horizontal resistance: At least two highs at roughly the same level
- Horizontal support: At least two lows at roughly the same level
- Multiple touches: More touches on both levels make the pattern stronger
- Time frame: The pattern should have enough duration to be meaningful
- Volume: Often decreases during formation, increases on breakout
Types of Rectangle Patterns
Bullish Rectangle
A bullish rectangle forms during an uptrend and breaks out to the upside, continuing the prior trend. It represents a pause in the uptrend before buyers push prices higher.
Bearish Rectangle
A bearish rectangle forms during a downtrend and breaks down, continuing the prior trend. It represents a pause in the downtrend before sellers push prices lower.
Reversal Rectangle
Sometimes rectangles break in the opposite direction of the prior trend, creating a reversal. This is less common but can lead to significant moves.
Trading Strategies for Rectangles
Strategy 1: Range Trading
Trade within the rectangle by buying at support and selling at resistance.
Range Trading Setup
- Buy when price touches support with bullish confirmation
- Stop loss just below the support level
- Target the resistance level
- Sell at resistance or when bearish signals appear
Tip: This strategy works best in wide rectangles with clear boundaries.
Strategy 2: Breakout Trading
Wait for price to break out of the rectangle and trade in the breakout direction.
Breakout Trading Setup
- Wait for a close beyond the rectangle boundary
- Confirm with volume spike on the breakout
- Enter on the breakout or on a pullback to the broken level
- Stop loss on the opposite side of the breakout level
- Target: Height of the rectangle projected from the breakout
Strategy 3: Anticipation Entry
Position for the expected breakout direction based on the prior trend.
- If prior trend was up, anticipate upside breakout
- Enter long on a bounce from support
- Smaller position size due to higher risk
- Add on confirmed breakout
Price Target Calculation
Calculate your price target using the measured move technique:
- Measure the height of the rectangle (resistance minus support)
- For upside breakout: Add height to the resistance level
- For downside breakout: Subtract height from the support level
Target Calculation Example
- Resistance: $55.00
- Support: $50.00
- Rectangle height: $5.00
- Upside target: $55 + $5 = $60.00
- Downside target: $50 - $5 = $45.00
Complete Trading Example
Breakout Trade on Stock XYZ
Stock XYZ has been trading in a rectangle for 6 weeks:
- Resistance: $80.00 (tested 4 times)
- Support: $72.00 (tested 3 times)
- Rectangle height: $8.00
- Prior trend: Uptrend
Trade execution:
- Breakout occurs with strong volume at $80.50
- Entry: $80.75
- Stop loss: $78.50 (inside the rectangle)
- Target: $88.00 (height added to breakout)
Risk: $2.25 | Reward: $7.25 | R:R: 3.22:1
Volume Analysis
Volume provides crucial information for rectangle patterns:
- During formation: Volume typically contracts as the range develops
- At boundaries: Volume often spikes when price reaches support/resistance
- On breakout: Strong volume confirms the breakout is genuine
- False breakouts: Low volume breakouts often fail and reverse
Common Mistakes to Avoid
- Trading narrow rectangles: The range must be wide enough to be profitable
- Ignoring the prior trend: Breakout direction usually follows the prior trend
- Chasing breakouts: Wait for confirmation or a pullback
- Forgetting volume: Always confirm breakouts with volume
- Overtrading the range: Not every touch of support/resistance is a trade
Pro tip: The longer a rectangle pattern develops, the more significant the eventual breakout tends to be. Extended consolidation builds up energy for a powerful move.
Track Your Pattern Trades
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Summary
The rectangle pattern is a versatile formation that offers trading opportunities both within the range and on breakouts. Look for clear horizontal support and resistance with multiple touches, use volume to confirm breakouts, and apply the measured move technique for price targets. Whether you prefer range trading or breakout trading, the rectangle pattern can be a valuable addition to your trading toolkit.
Want to learn more chart patterns? Check out our guides on broadening patterns and continuation patterns.