Contents:Rectangle patterns is a technical analysis pattern which is formed on the horizontal price movement, after a long (or at least a medium-term and clear) trend. This pattern resembles a channel, because it is built based on resistance and support lines.
The great thing about the rectangle is that it can provide traders with many strong signals, based on which they can develop one or more profitable binary options strategies.
Example of Rectangle
Here are the main principles and rules for building a rectangle:
- Market trend – the trend has to show an impulse before forming the pattern;
- A temporary correction is made of highs and lows that form two parallel lines horizontally.
A rectangle is a continuation pattern, so you can’t buy options against the current trend. Once we noticed a rectangle on the chart, we will wait for the price to break the resistance or the support line, and only after the breakout is confirmed, we will be possible to buy options in the direction of the previous (current) trend.
Here is an example of a classic rectangle chart:
On the image above, you can see a bearish rectangle. Basically, it has all the attributes: a downtrend, a temporary correction and then the continuation of the trend. It is important to remember that a rectangle is nothing more than a market correction. If we would try to give an accurate definition of the essence of this phenomenon, then we would say that the market has made a sharp move in one direction, but this move was excessive. Because of this, the market needs consolidation and a break. During this consolidation, bulls and bears have a rest and then the market continues its previous movement.
Bullish Rectangle example
When confirming a bullish rectangle, you should pay particular attention to volume levels, which is why you should apply the volume indicator on the chart.
You must notice the three following situations on the chart:
- During the pulsed market move right before the rectangle, the volumes should be high;
- When the rectangle pattern shows up, volumes drop sharply;
- During the continuation of the trend, after the breakout, volumes return to high values.
In this way, you can always check the correctness of the rectangle construction.
In practice, there are many situations when a rectangle is formed on the chart, but the volumes increase with compared to trend lines. This is a sure sign that there will be a reversal, so you should not buy binary options in the direction of the previous trend! In this case, you can consider the rectangle a reversal pattern.
If you like this strategy, you might also be interested in this Binary Options Hedging Strategy
Practical tips for using Rectangle Pattern
When trading on this pattern, there are two possible types of signals and approaches:
- Classic signal – in this case, you should buy an option when the price breaks the trading channel. You should open a position in the direction of the breakout;
- Non-standard signal – in this case, you can trade inside the rectangle channel. First, we build a rectangle of 4 points (2 highs and 2 lows).
Then, each regional high or low that couldn’t break the rectangle chart will be regarded as a signal for trading on the price reversal to the opposite limit of the rectangle. It is the same like trading the channel.
It’s important to have a target in mind, because the continuation cannot last forever. Well, it’s difficult to come with a precise recommendation, but most traders tend to believe that the optimal target should be equivalent with the height of the rectangle.