The rectangular price pattern is based on the very important ability to identify support and resistance. It can provide you with consistent returns in a small trading window. This guide aims to show you how to recognize the pattern and how to apply it properly while trading at Olymp Trade.
How to recognize the rectangular price pattern
Let’s talk for a moment about the ranging market. The prices are rising to a certain point just to fall to another specific point. A higher price creates a resistance level and the lower provides support. They are strong enough so after the price reaches them, it just bounces back without breaking a resistance or support.
The support and resistance are created by adding lines that are parallel to each other. The support line will be created by joining at least two bottoms. The resistance line will connect at least two tops. Take a look at the 30-minute DAX chart below.
The rectangle pattern is noticeable when the trend is going to an end. It suggests a change in the trend direction.
So the moment when you can spot price consolidation will be at the top of an upward trend or the bottom of a downward trend. And what it is saying is that the directional movement has been finished and the trend is ready to reverse. At this time, prices do not exceed or fall below a certain level.
What to do when the rectangular price pattern appears
In most cases, it is easy to recognize the price boxes pattern once it has developed. But do not worry. You may still earn some profit to take out of it before the new trend begins.
The first step you should take is to draw the support/resistance lines. Then lookout for the moments when the price hits the lines. When it will be the support line, you should open a buy position. In case of touching the resistance line, open a sell position.
We recommend using the large time frame chart while trading short-term trades. If, for example, the chart you are trading on is a 30-minute one, open 5-minute trades. Like this, you rest assured that the price will keep inside the rectangle and not rebound before the expiration of the trade.
Pros and Cons of Trading Rectangles on Olymp Trade
- Consistent returns within a small trading window when applied correctly.
- Helps identify potential trend reversals.
- Can be used in combination with other technical analysis tools for more accurate trading decisions.
- Requires practice and experience in recognizing support and resistance levels.
- Not foolproof; losses may still occur.
- Not suitable for all trading styles and strategies.
|Top 5 Tips for Trading Rectangles||Mistakes to Avoid when Trading Rectangles|
|1. Practice identifying support and resistance levels.||1. Overtrading and not waiting for proper setup.|
|2. Combine with other technical analysis tools.||2. Ignoring the overall market context.|
|3. Be patient and wait for the right entry points.||3. Not using a stop loss or risk management strategy.|
|4. Start with a demo account to practice your skills.||4. Relying solely on the rectangular price pattern without additional analysis.|
|5. Stay updated on market news and events that could impact the price movement.||5. Overconfidence and not being prepared for potential losses.|
What to do when the price overcomes the support or resistance level
You must prepare yourself for the moment the price will break the support or resistance level. It will happen, sooner or later. Observe the direction in which the price is going after the breakout and trade accordingly.
If the price breaks the resistance level, like in our exemplary chart below, you should enter a buy position, as the uptrend is developing.
You can read more about trading after the price breakout in our guide.
The price boxes pattern lasts a while and during this period the price is going up and down within a certain range. And finally, when the price momentum is considerably strong, it breaks the barrier. You can observe some signals that this is going to happen. The candles, for example, are longer and of the same color. Thus, you have the right to expect the market will keep moving in the breakout direction.
And consider all the above, you can enter the trade in line with an evolving trend.
Now that you know the rectangular price pattern you can start using it. Practice on a free demo account and then move onto the real Olymp Trade account. However, always be wary that this strategy is not a magic formula for success. You will most likely face losses, as you can never completely eliminate risk when dealing with the financial market.
Share with us your experience.
Wish you success!
Frequently Asked Questions
- Q: Can the rectangular price pattern be applied to any asset?
A: Yes, the rectangular price pattern can be applied to various assets, such as stocks, commodities, and cryptocurrencies. However, it’s essential to understand the unique characteristics of each asset and adjust your strategy accordingly.
- Q: How can I improve my ability to recognize support and resistance levels?
A: Practice is key to becoming proficient at recognizing support and resistance levels. You can start by analyzing historical price charts and studying price patterns. Combining this with other technical analysis tools can further enhance your skills.
- Q: How long should I practice on a demo account before trading on a real account?
A: There is no fixed time frame for practicing on a demo account, as it depends on your level of experience and confidence. It’s important to feel comfortable with your trading strategy and risk management before transitioning to a real account.
- Q: Are there any other price patterns similar to the rectangular price pattern?
A: Yes, other price patterns, such as triangles and flags, also focus on support and resistance levels. Understanding multiple price patterns can provide you with a more comprehensive approach to trading.
- Q: Can I use the rectangular price pattern for long-term investments?
A: While the rectangular price pattern is typically used for short-term trading opportunities, it can provide insights into potential trend reversals, which may be helpful for long-term investments. However, long-term investments often require a more in-depth analysis of fundamental factors.
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