A rectangle is a pattern formed when price is bounded by parallel support and resistance levels. A rectangle exhibits a period of consolidation or indecision between buyers and sellers as they take turns throwing punches but neither has taken over.
The price will “test” the support and resistance levels several times before eventually breaking out. From there, the price could trend in the direction of the breakout, whether it is to the upside or downside. Rectangle patterns are chart patterns that contain price movements and forms as a trading range between two price movements.
They are usually considered as a continuation pattern, but at times also can be a reversal pattern. You need a minimum of four points to draw a rectangle: The upper line connects two rally tops, and the lower line connects two bottoms.
The upper line shows where bulls run out of steam; the lower line shows where bears become exhausted. So a rectangle shows that bulls and bears are evenly matched.
Rectangle patterns are also known as Trading Ranges, Consolidation Patterns, Flat Base and a Sideways Pattern. Rectangles can can extend for a few weeks or many months.
For further in-depth information on stock market charts and stock chart patterns, check out this resource, which contains critical information to help you learn to use stock charts and technical indicators in a clear, simple and concise manner to improve your stock trading entries and exits.
Bearish Rectangle
A bearish rectangle is formed when the price consolidates for a while during a downtrend. This happens because sellers probably need to pause and catch their breath before taking the pair any lower.
Bullish Rectangle
For you to understand it better we have another example of a rectangle, a bullish one this time. After an uptrend, the price paused to consolidate for a bit. Can you guess where the price is headed next?The answer is up.
In the bearish rectangle example, once the pair breaks, it will usually make a move that’s at least the size of its previous range.
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