A Rectangle pattern is generally formed when the trend decides to take a pause and the market participants take a break from the market. The pattern is characterized by a confluence of the swing highs taking place almost at the same level, just like the swing lows too. On the Candlestick or Bar charts, the height of the rectangular range is projected from the breakout level to determine the expected target but on a Point & Figures chart, the width of the rectangle is a major factor too. The volume pattern in a Rectangle doesn’t show any marked characteristic.
Most Used Trends of Rectangle Pattern
Advantages & Limitations Of Rectangle Pattern
The Rectangle is more frequently seen as a top than a bottom in case of the liquid stocks. The failure rate is sometimes too high with a lot of false breakouts but the performance of a successful breakout is excellent. The taller the range, the better the performance. Volume drying up inside the range and then increasing with the breakout is good but contrary to myths, the best performance is seen if the volume inside is random. Most of the times, selling at the highs and buying at the lows gives excellent return and less risk than trading the breakout.