Hello and welcome to another edition of the bulls vs the bears. Last time we touched on How to Trade Cash In On Wedge Chart Patterns. This week we are going to touch on how to trade breakouts via rectangle chart patterns
. First we’ll define what a rectangle chart patter is. Then we get into the really exciting stuff. We’ll look at two types of rectangle chart patterns and how to trade them.
So First off:
What Is A Rectangle Chart Pattern?
Well, a rectangle chart pattern comes into play when price is bound by parallel support and resistance levels. A rectangle chart pattern takes shape after a period of consolidation between the bulls(buyers) and the bears(sellers). In case you’ve forgotten what consolidation is about, this is where buyers and sellers reach a stalemate after trading uppercuts with each other.
Price then takes a crack at(or tests) support and resistance levels several in a desperate attempt to break out and head for the hills or the slope(depending on whether the bulls or the bears are in charge.. Fortunately price breaks out of prison and heads wherever direction the wind decides to blow it. That of course depends on when whether the bulls or the bears are in charge.
Let’s look at an illustration of the price action on the rectangle chart
As you can see price is sandwiched by support and resistance levels running parallel to each other. Now all you have to do is hold your horses and wait for one of these levels to go on the break and tag along for the ride.
Now shall we look at the two types of rectangle chart patterns that I told you about.
A bearish triangle takes shape during the downtrend when price consolidates for a while. Of course during the consolidation period, the bulls and the bears trade uppercuts in an attempt to get the upper hand.
But of course the fight ends in a stalemate. This causes the bears to take a breather and revise their notes before deciding where else to drive the price. Let’s take a look at the price action with the bears
The bears break out at the bottom of the rectangle chart and go at full speed down the slope. If you are smart, you’d put in a sell order just below the level of support and rack up some sweet profits along the way.
Now let’s see how it pans out in the price action breakout
Now price, led by the bears surge beyond the level of support. The surge of the bears is the same size as the rectangle pattern,which is illustrated by the blue upward arrow. It is also where you set your take profit target.
Notice how the bears surge past the take profit target. That’s a queue for you to amass more profits along the way.
Last but not least is:
Bullish Rectangle Chart Pattern
The bullish rectangle chart pattern shows up in the uptrend. Now just like the bearish pattern, price goes into consolidation. And just like the bearish pattern, the bulls try to knock out the bears but to no avail. So the bulls take a breather to decide on where else to drive price.
I can hear someone saying”Which direction is price heading to?” Well, there is only one way to find out.
And as you can see, price is heading in one direction -upwards according to the blue arrow. Now let’s see by how much the bulls headed upwards
Well the bulls, accompanied by price have broken through the rectangle by a country mile and are heading for the hills. However the height of the bulls surge is similar to that of the rectangle chart pattern- as the blue upward arrow suggests.
So if you want to make some money just place your buy order(or long order) just above the level of resistance. It would be worth a lot of cash and your while at the same time.
That’s a wrap for “How To Trade Breakouts Via Rectangle Chart Patterns.” We started by saying the rectangle chart pattern comes about when price is stuck between support and resistance levels. And during that formation price goes into consolidation where the bulls(sellers) and the bears(sellers) take turns throwing left hooks but neither side lands the knockout punch. They then take a breather to decide where to drive price to next.
We also did say that there were two types of rectangular patterns. There first was a bearish rectangle pattern which occurs during the bearish trend where price consolidates while the bears catch their breath. The same situation happens in the bullish trend where price also consolidates with the bulls also catching their breath and deciding what to do next.
Next time we will look at how to trade bearish and bullish pennants
Til next time take care
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