Introduction
A rectangle pattern as the name suggests is formed when the price of an asset is found in the range phase. That is when the price of the asset is trading between the same horizontal support and also the same resistance level. It is considered a rectangle because of the top and bottom ends of the trend which are considered as the resistance and support levels respectively.
As stated earlier, that rectangle trends are formed as a result of ranging periods and this shows that there is no trend in the market at that period. This is because at that period the price of the asset is only seen moving up and down without any continuous movement in a specific direction but rather moves between the support and resistance level.
It is observed that rectangle patterns have two distinct horizontal lines in which the price of the asset bounces to and fro. This bouncing back continues until there is a breakout in the price movement which either moves bullishly or bearishly.
A good example of the rectangle pattern in real life can be the movement of water through the pipeline. The water continuously moves upward and downwards horizontally until when there is a breakage in the pipe which would lead to the movement of the water in a specific direction depending on where the leakage is found at.
Rectangle patterns can be identified by two factors which I would be explaining below here in this article. These two factors are price trend and horizontal trendlines. First of all, let's look at the price trend factor.
Price Trend:- The price trend of an asset is a very important factor that traders or investors must consider first before entering into any trade. It is good to know if the market is trending bullishly or bearishly before entering into the market to avoid loss and make a profit at the end of the trade.
The price trend in identifying a rectangle pattern is simply when there is a continuous moving of the price of an asset in a multiple up and down movement forming a range phase. This can be simply termed as when the price of an asset is moving in a zig-zag form.
From the chart shown above, we can see that the trend that occurred before the formation of the rectangle pattern, the price of the asset was trending bullishly until it got to a point where the price started to be moving in a zig-zag manner. The rectangle pattern is formed as a result of the zig-zag movement bouncing between the support and resistance levels continuously.
Horizontal Trendlines:- Horizontal trend lines as we know best indicate the formation and identification of rectangle patterns. This is because in horizontal trend lines there is the movement of the price of the asset bouncing between the support and resistance level which turn to create or form the rectangle pattern when there is a continuous movement of this trend.
A horizontal trend line leads to the formation of the zig-zag movement of the price of the asset and this is an indication of a rectangle pattern. I would illustrate an example in the chart shown below.
Yes we can use an indicator to support the rectangle pattern in identifying perfect and accurate results. There is no trading strategy that does not require an indicator to support in identifying or predicting future trends and as a matter of that, the rectangle pattern also needs an indicator to support obtaining accurate and perfect results.
Applying an indicator with the rectangle pattern would help traders and investors to identify accurate entry and exit positions and also identify false signals in the market. The use of indicators also aids in identifying breakouts in the market too. It can be observed that the use of indicators with trading strategies helps traders to acquire more profits and also avoid losses. I would be using my favorite indicator with the rectangle pattern here in this assignment and that is the MACD indicator. This indicator consists of two lines, the MACD line which has blue color as its default setting, and a signal line which also has a red/ orange color as its default setting. I would be illustrating an example in the chart shown below.
From the chart shown above, we can see that, after a bearish trend in the price of the asset, the price of BTCUSDT moved in a zig-zag manner by bouncing between the resistance and support level. We can observe that the MACD line and the signal line indicated a close movement between them with little to no gap between them indicating a range trend. We again saw that the breakout seen in the price chart is similarly, indicated by the MACD indicator such that the MACD line break below the signal line which indicates a downtrend and that was exactly what happened after the breakout.
This shows that it is very necessary to use an indicator to support the rectangle pattern trading strategy in order to predict accurate and perfect results.
Rectangle Tops:- occurs when there is the formation of an uptrend in the price of an asset. They are rectangular patterns formed with the entry price of the asset at the top of the trend or patterns which can later break at the bottom of the trend. Rectangle tops are usually spotted before they occur. A good illustration is shown below in the chart indicated.
Rectangle Bottoms:- occurs when there is the formation of a downtrend in the price of an asset. They are rectangular patterns formed with the entry price of the asset at the bottom of the trend or patterns which can later break at the top of the trend. We can see that the rectangle top is formed at the top of the trend or pattern whilst the rectangle bottom is formed at the bottom of the trend or pattern. A good illustration is shown below in the chart indicated.
To perform this trade, I would be illustrating entry points, take profit, stop loss, and also breakout setup for both buy and sell trade using the rectangle pattern trading strategy. The following steps are to be taken in order to undertake this trade.
Buy Trade Setup:-
First search and identify the rectangle pattern on the chart
Wait for the breakout of the rectangle trend or pattern
When there is an indication of a clear breakout out above the resistance level then we execute a buy order.
Stop-loss is set at the support level or at the bottom line of the rectangle pattern
For my trade I set the risk: reward ratio at 1:2 as indicated below from the screenshot.
From the screenshot above, we saw that the price of ETHUSD formed the rectangle pattern and a sudden breakout occurred above the resistance level which created or signaled an entry point (buy entry) as indicated on the chart.
Buy Trade Setup:-
First search and identify the rectangle pattern on the chart
Wait for the breakout of the rectangle trend or pattern
When there is an indication of a clear breakout out below the support level then we execute a sell order.
Stop-loss is set at the resistance level or at the top line of the rectangle pattern
For my trade I set the risk: reward ratio at 1:1 as indicated below from the screenshot.
From the screenshot above, we saw that the price of BTCUSDT formed the rectangle pattern and a sudden breakout occurred below the support level which created or signaled an entry point (sell entry) as indicated on the chart.
Conclusion
To conclude, I would like to give a summary of what has been done so far in this article. First of all, we looked at the concept of rectangle patterns and gave a real-life example. Also, we looked at how to identify or spot the rectangle patterns on crypto charts with good illustrations as well. We explained both the price trend and the horizontal trendlines as a factor in identifying rectangle patterns.
Moreover, we also indicated how we can use the MACD indicator with the rectangle pattern strategy in order to achieve accurate and perfect results during trades. Furthermore, we also looked at the concept of rectangle tops and rectangle buttons whereby we included screenshots of crypto charts to further explain more in detail.
Finally, we set up two demo trade entries by indicating entry points, take profit, stop-loss, and breakout on the chart. We also explained the process of trading with the rectangle pattern for both buy and sell entries.
I would like to say a very big thank you to professor @sachin08 for this wonderful lecture. I have really understood the concept of Trading using rectangular patterns. Thank You.