Rectangle Formation

Trend is your friend. Dance with your friend. Tune to the trend.

Rectangle Formation can be both continuation and reversal chart patterns. The stock prices tend to move between two horizontal support and resistance lines.

Pattern Formation
First learn to draw Trend Lines. Draw resistance trend lines in a down trend and support trend trend lines in an up trend. The moving prices get stuck between two horizontal resistance lines giving us a rectangle chart formation. When ever the stock price breaks above or below this rectangle we get a trading opportunity.

Volume invariably rises at the break out point, which indicates a strong trade.

Study the chart given below.

rectangle formation, price channels, chart patterns

This is a monthly bar chart. See how the prices have consolidated for nearly eight years before it broke above the rectangle or channel formation. The prices retraced back to test the resistance turned support line. It has stayed there for an year. It then made a explosive movement up to reward the trader ten times on the investment.

How to trade?
Buy above the high of the channel with low as the stop loss and sell below the channel with high as the stop loss. Conservatively the stop loss can be put just above or below the break out trend line as the case may be.

Many times the prices reverses and tests the break out point, before continuing in the direction of the breakout. Best entry is made at this point with the stop loss above or below the swing formed at the point of testing.

Variation
The support and resistance lines need not be horizontal. But they can be slanting but parallel, giving the formation of price channels.

Longer the time the prices spend time between the trend lines, stronger will be the channel break out results.



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Click here to learn about Candlestick Patterns.

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