The rectangle is sometimes referred to as a channel or a consolidation. It is a very well known and easily recognized chart pattern that has been used by many successful traders over the years, including Nicolas Darvas who made over $2 million in the stock market using a variation of the rectangle he called a Darvas box. A rectangle is formed when the price action is contained within two lines. Both the top line and bottom line are close to horizontal and the two lines are parallel.
Rectangles, A Traders Favourite Pattern?
Rectangles show no clear tendency to break up or down. Despite the fact 54% of the patterns break out to the upside this is likely due to the fact the market tends to move higher. Around half (56%) of these breakouts are profitable and on average the profit per trade is 1.15% over a period of 12 days.
Improve Your Trades
A break to the upside works better in a rising or consolidating market. By using filters that require the market, sector and stock to be in a consolidation or an up trend you can improve the results.
Rectangles are not dependent on where in the pattern the breakout occurs. The length of a rectangle is important with patterns that are longer than 10 days and less then 35 days producing better results.
If the volume is in support of the breakout the results are better. Supportive volume means the volume on the way up is higher than the volume on the way down. The best results are achieved if the high is higher or equal before the breakout and do not trade patterns that are formed around an outside day candle.
Rectangles Deliver Strong Profits
By following these simple rules profitability of trading rectangles can be improved substantially. With an average return per trade of 1.89% in 13 days and an extremely high hit rate of 71% it is understandable why many traders are drawn to the rectangle.
Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008.
Jeff Cartridge has been trading chart patterns since 1998 and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains
Tags: cfd trading strategy, contracts for difference, Rectangles, stock market, Trading CFDs, Trading Channels, Trading Chart Patterns, Trading Consolidation Patterns, Trading Rectangles, Trading Rectangles Long, trading stocks, Trading Strategy Rectangles