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, Breakout Unclear
Rectangle breakouts show a slight bias to the upside with patterns breaking up 54% of the time. This upward bias is likely due to the overall bullish bias of the market as the symmetrical nature of the pattern does not clearly indicate a breakout direction. The breakout of rectangles can deliver strong returns with 56% of the patterns being profitable. The average return for the long trades is 1.15% in 12 days.
Refine Your Entries
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.
Volume is important with rectangles ensure that the volume is supportive of the breakout with the volume as the share rises more than volume as the share falls. Avoid patterns that have lower highs prior to the breakout or the last turning point is formed by a single outside candle.
Trading Rectangles Can Be Very Profitable
You can improve your trading results by using a series of simple filters that have been outlined here. This select group of rectangles delivers an average profit of 1.89% in 13 days and is profitable on a very high 71% of the trades. Overall this makes rectangles attractive to trade.
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.
