Forex Rectangle Patterns:

A forex rectangle pattern is technical analysis pattern consisting of horizontal lines called support and resistance lines. Rectangles are used for channels or Breakout Trades. Generally forex rectangle patterns are considered as continuation patterns. To say a pattern as a rectangle pattern, it should have at least four pivot points two at the top resistance line and two at the bottom support line. It is considered a period of indecision. Confirm top and bottom with four pivot points. Two on top, two on bottom. Some times rectangles may form with more than four pivot points. For example you may find a rectangle with 6 pivot points, three at the top and three at the bottom. This is ok. But a rectangle should have have at least four points with two at the top and two at the bottom.

The following is an example picture of how a rectangle pattern looks like in a down trend. It is drawn using four pivot points, two at the top resistance line and two at the bottom resistance line. If any of these resistance lines broken in any direction it’s a good opportunity to enter the trade in that direction. Since rectangles are considered as continuation trend patterns I showed that it is breaking in the downward direction. It may not be true always. Sometimes it may break the rectangle in the reverse direction also.

Forex Rectangle Pattern

Trading Entry:

Enter the trade when the support or resistance line is broken with a strong candlestick. A strong candlestick means a candlestick which has a large body with relatively small tails or no tails at all. Check the following picture. In the following picture the support line is broken with a strong candlestick. It does not have long tails compared to the body of the candlestick. So its a good opportunity to enter a short trade.

Forex rectangle broken with a strong candle stick

If the candlestick has a long tail compared to the body of the candlestick and if its the tail and not the body of the candlestick that broke the support or resistance line then do not enter the trade. For example check the following picture. In the following picture a rectangle is showing and the rectangle is broken by the tail of the candlestick and not the body of the candlestick. Moreover the candlestick has a long tail compared to the body of the candlestick. So its not a good opportunity to enter the trade.

Forex rectangle broken by the tail of the candlestick and not the body

So whenever the support or resistance line is broken with a strong candlestick wait for the candlestick to the completed. When the candlestick completed enter the trade

Take profit and stop loss levels:

Measure the difference between top & bottom that means the resistance and support lines. The difference is expected to be roughly the same as the potential breakout. When breakout occurs enter into trade. Set stops inside the rectangle & Set target (limit) for less than the difference between top and bottom rectangle. Remember target price is measured from rectangle. Monitor the trade until exit price is achieved.

Check the following picture. In the following picture the difference between the resistance and support line is 40 pips. So the potential break out will be 40 pips. Once the support line is broken by the candlestick penetrated 10 pips downward. So the profit should be 30 pips more. But always use some less number of pips than the actual target. Since in the above example there are 30 pips more for profit put the take profit level 5 pips less than the original that means 25 pips. Set stop loss around 5 to 10 pips above the support line with in the rectangle.

Stop loss and take profit levels

If the market tests the original support or resistance levels of the rectangle it can be an opportunity to reenter the original trade. That means sometimes the price charts my retrace back to the support line or resistance line then its another good opportunity to enter the trading.