Rectangles have been very popular with traders over the years trading the chart pattern when it breaks out in either direction. A rectangle is defined by two lines, one on the upper boundary of the price movement and one on the lower boundary, both of which are horizontal. The lines are parallel. These can be referred to as consolidations or channels, or the well known Darvas Box, used by Nicolas Darvas to make $2 million in the markets.
Rectangles, Not Usually Traded Short
Rectangles are definitely not one of the most predictable patterns that are available to trade short. With just 46% of the patterns breaking down rectangles also don’t deliver good returns when they do. The average gain is negative, -0.03% in 10 days with less than half of the breakouts (42%) being profitable. These results aren’t great, but selecting the right conditions can make trading rectangles better.
Specific Setups to Improve Profitability
A break to the downside requires certain market conditions to be effective. Avoid falling markets, so look for markets that are consolidating or rising. By using filters that require the stock to be in consolidation and the sector to be in a trend, either up or down, you can improve the results.
A breakout from a rectangle is best if the pattern is not formed by a large candle touching both boundaries. This does not happen very often. The best trades occur if the stock has lower highs and does not have a close equal to the previous day, before the breakout occurs.
Ensure that the volume is supportive of the breakout, i.e. volume as the stock falls is greater than volume as the stock rises.
Rectangles Profitable on the Short Side as Well
When trading rectangles short these filters are very important to get good results, making this an extremely difficult pattern to trade short. With these filters in place, an average return per trade of 1.07% in 13 days and a hit rate of 63%. There are better patterns to trade short.
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 is a private trader and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains
