The Rectangle Formation: A Simple but Powerful Way to Trade

The rectangle or rectangular formation represents a pause in the trend during which prices move sideways between a support and a resistance. This area between a support and a resistance is sometimes also known as the trading zone or congestion area.

the rectangle formation

The rectangle is usually a continuation figure of the trend and acts as a pause in the price of the primary trend. If the price breaks the upper part of the rectangle, that is, the resistance, it implies a buy signal, and if the price breaks the support or lower part of the rectangle it is a sell signal. For these signals to be valid, the volume must increase at the moment when the price breaks the mentioned areas. In terms of duration, the rectangle usually lasts between one and three months, like triangles and wedges.

projected objective

The objective of this technical trend figure will be the projection of the distance between the support and the resistance of the rectangle. The break of the rectangle can sometimes be accompanied by a pullback or a throwback (depending on whether it breaks the support or the resistance), which represents a second opportunity to enter the market in favour of the trend.

In the following image, we can see a real example of a rectangle, this time with bearish implications and without a pullback, unlike the theoretical chart above, which has bullish implications and a throwback.

projected objective of the rectangle formation

Note: the evolution of the volume can give us certain indications of where the price will break, if the bullish candles within the rectangle have more volume than the bearish candles, there is a greater probability that the price will break the resistance, and vice versa, if the bearish candles have more volume than the bullish candles, it is more likely that the rectangle will break its support.

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Is the rectangle a continuation pattern?

Yes, the rectangle typically acts as a pause in the primary trend, signalling potential trend continuation.

How can I identify buy and sell signals with rectangles?

A break above the resistance implies a buy signal, while a break below the support indicates a sell signal.

How long does a rectangle formation usually last?

Rectangles usually persist for one to three months, similar to triangles and wedges.

What is the objective of a rectangle pattern?

The objective is to project the distance between support and resistance for potential price targets.

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