In this lesson, we’ll explore the Rectangle Pattern—a continuation formation that often appears in the middle of a trend and signals its extension before the eventual breakout in the direction of the prior move.
Characteristics of the Rectangle
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Definition:
The rectangle is bounded by two horizontal trendlines drawn through two highs and two lows (four pivot points) that frame a rectangular consolidation zone. -
Volume:
Volume typically declines during the rectangle’s formation, reflecting a period of market indecision and consolidation.
Trading Signals
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Buy Signal:
Generated when price breaks and closes above the upper boundary of the rectangle, ideally on a clear surge in volume. -
Sell Signal:
Generated when price breaks and closes below the lower boundary of the rectangle.
Measured Move
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Price Objective:
After the breakout, the expected price move should be at least equal to the rectangle’s height (the vertical distance between its support and resistance lines).
Trading Tactics
For Crypto Holders
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Trading Within the Rectangle:
You may buy near the lower boundary once the four pivots are in place, and sell near the upper boundary. -
Downside Breakout:
Sell immediately upon a clear close below the lower trendline. -
Upside Breakout:
Sell into strength on the breakout, then consider re-entering on a pullback if volume confirms the move.
For New Entrants
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Upside Breakout:
Wait for the pullback after the breakout above resistance—and confirm with rising volume—before initiating a long position. -
“Sixth Touch” Entry:
In a strong uptrend, if price revisits the support line for a sixth touch but holds, you may consider entering there.
Final Notes
The Rectangle is a powerful continuation tool that highlights periods of consolidation before a trend resumes. However, no pattern is infallible—always seek confirmation from other technical indicators, employ strict risk management, use stop-loss orders, and diversify your positions.
