A rectangle chart pattern may appear if a pair continues to bounce between a high and a low over and over again. When it bounces back and forth like this, the trend lines can start to take on the look of a rectangle. Thus, the name of the pattern. Ultimately, it’s a ranging chart pattern.
When you see this pattern come up, you may be tempted to think that the pair is going to continue to trade in this limited range forever, but that is not the case. Eventually, it will breakout to one side or the other. That is where you can make your money.
This happens when the pair has been in a downtrend for some time, but the sellers take a moment before carrying the currency even lower. This pause in the action may cause a rectangle formation to take shape. If that is the case, you will want to note the action that happened before the rectangle came into play.
It may be the case that you just need to wait until the rectangle starts to head back down towards it support line before placing a trade in the hope for a breakout to the downside.
Often, traders will look for the break below support to be at least the same size as the rectangle range.
The bullish rectangle is just like the bearish one except that it forms in the opposite direction. When a currency pair has been climbing and climbing, traders may take their foot off the pedal for a while and allow the pair to bounce back and forth in a rectangle before regaining steam and carrying the pair even higher.
Similarly, traders will look for the break above resistance to be at least the same size as the rectangle range.
You should look for these patterns to form if you want to capitalize on the potential for a breakout to allow you to profit in a big way moving forward. You should try to take advantage whenever rectangles form so you know for sure how you will continue your trade as the breakout takes shape.
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