[Trading Using Rectangle Pattern] - Crypto Academy / S5W4 - Homework Post for @sachin08
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Hi guys, welcome to my homework post for week four lesson by professor @sachin08. I will be describing the rectangle pattern as applied in trading. I will go ahead to make short and long positions in order to express how one can apply this technique together with the signals from two different indicators. The understanding below comes from my professor’s lesson. Without wasting time, let’s get on it.
QUESTION 1:
Explain Rectangle Pattern in your own word.
Like the triangle pattern, the rectangle pattern is also of vital importance to traders. This pattern is one in which we can picture as tunnel through which a railway is built into. When the train moves into the tunnel it either descend or ascend which of course in the market will bring new entry opportunities.
The rectangle pattern is such that there’s a flat top where a possible trend line can connect at least two price points marking a resistance and a possible flat bottom connected by two or more price points with a trend line acting as the support. Here the market moves horizontally between the said support and resistance line that forms the rectangle. If there’s a breakout from the horizontal trend, there’s a trading entry opportunity. Rectangle patterns often starts with an undershoot (a short dip before the rectangle) or an overshoot (a short rise before the rectangle). Rectangle patterns can occur in a bullish market or bearish market.
ZEC/USDT pair Source
As one can see from the above screenshot, the rectangle pattern is made up of a trend line on the upside for the resistance and a trend line on the down side for the support. The breakout is the exit point or price through which the price movement breaks the trend line (support or resistance) and make an impulsive move. This can be in any direction for this pattern. At the time I took this screenshot above the had not been any breakout from the triangle.
When there’s about to be a downtrend on the triangle (that is a bearish breakout), price will close below the support and hence triggering a bearish breakout. Thus, for an uptrend on the triangle pattern (that is a bullish breakout), the price will close above the resistance line making an impulsive bull run.
QUESTION 2:
How to identify Rectangles. Explain with Screenshots.
To understand the occurrences of triangle patterns, one has to be extra conscious with the support and resistance prices at an area that looks like a consolidation. The identification of triangle patterns can be noted from the following characteristics
Price Trend
The price trend observed on the triangle patterns are in a form of a consolidation. This means that prices trade between a certain market interval making tops that can be determined by a single straight horizontal line indicating a resistance while the the bottom forms a chain of prices making a support line. If these prices that support a trend line appear to be two or more, that position of the market can be considered as a triangle set up. Once prices move horizontally, it should capture the mind of a trader who uses the triangle pattern.
ZEC/USDT pair Source
From the screenshot above we can see that on the upper trendline the price touches the line at point A, B,C, and D while at the support line prices touched E,F,G and H. To set the strategy up, you simply join the highs into a trend line making a resistance, and also join the bottom lines making a support. With this constructed for the analysis you can now wait for the breakout in order to enter a trade. By doing this you make sure your prices are joining to form the support and resistance are not bias. This means that the prices should be spaced and making sure the is no concentration of such points on one side of the chart at that position but rather they should be separated from each other.
QUESTION 3:
Can we use indicators with this pattern to get accurate results? Explain with Screenshots.
It is always good to use indicators to compliment one another for trade efficiency and success. We can simply use the momentum oscillator to aid and give meaning to entry point during a rectangle pattern strategy utilization. This indicator alongside the Moving Averages will enhance the decision precision more better.
Momentum oscillator
When there’s a slight change in the momentum oscillator during a triangle formation it indicates that the price movement within the rectangle is about to change. Depending on the direction within the momentum oscillator, one can determine the direction of the breakout. The screenshot below helps explain this.
ZEC/USDT pair Source
From the above screenshot one can clearly see how the momentum oscillator gave a buy long signal as price broke through its own trend line within.
Simple moving average lines
When there’s a moving average cross over one can predetermine a breakout from rectangle pattern. When the long-term, medium-term, and the short-term moving average cross over each other such that the short term is just below the market trading price, followed by the medium-term and lastly the long-term therefore we may have a bullish breakout and the reverse is true for abbearish breakout.
ZEC/USDT pair Source
The above screenshot shows how that the was a cross over by the three moving average lines just before the breakout.
QUESTION 4:
Explain Rectangle Tops and Rectangle Bottoms in your own words with Screenshots of both patterns.
Rectangle tops and bottoms are simply where the rectangle is formed and not about the “analogy” of the rectangle. Therefore this should not be confused with the top/bottom part of a rectangle. The rectangle top means that the rectangle formed on the top or bottom of price movement.
To make this easier to understand, I will explain the rectangle tops and bottoms separately.
Rectangle Top
This is simply a rectangle formed during and uptrend, mostly at the top of the trend.
If We want to find whether the Rectangle is a top or bottom, then look at the price trend which leading to the start of the rectangle. Rectangle bottoms have price trending downwards into them, but Rectangle tops have price tending upward.
ZEC/USDT pair Source
From the above screenshot we can see how the rectangle formed just after an upward movement (that is at the top of a bullish move)
In simple words, We can say that Rectangle Top is formed at the top of the trend. With the rectangle tops, the volume often recedes in the whole length of therectangle.
Rectangle Bottom
For the rectangle bottom it requires an existing bear market and the rectangle forming at the base. We can simply say that a rectangle bottom is formed at the bottom of the trend.
ZEC/USDT pair Source
From the above screenshot we can see a bear market before we had the rectangle at the bottom and just before the rectangle we have an undershoot.
QUESTION 4:
Show full trade setup using this pattern for both trends. ( Entry Point, Take Profit, Stop Loss, Breakout)
Uptrend
The overall trend was a bullish one and then the was a triangle formed at the top of the trend. Thereafter a bearish breakout happened. After price breakout we make an entry. On this chart below I made entry point at the bearish breakout of BTC/USDT pair. The entry is at 55,913$ with stop loss a little above the resistance line of the triangle. My take profit is right below at 42,945$. Checking the trading volume, it was on a descend indicating that the will be a breakout soon.
BTC/USDT pair Source
Downtrend
This trade set up was made from an overall downtrend whereby a rectangle was formed below the trend just after an undershoot. This is from the ZEC/USDT chart. After confirming with the trading volume and momentum oscillator together with the moving average lines a true trade entry position was seen according to the rules of the rectangle pattern. My entry point was taken just after the resistance line on the top of the rectangle and the stop loss below the support line value. The take profit was set at an existing resistance at the upper level not too far in order to avoid losses if prices can’t make it above the old resistance.
ZEC/USDT pair Source
The rectangle pattern just like the previous triangle and flag patterns we studied with the professor, are of vital importance to every trader in understanding trend continuation or reversal during a certain “consolidation”. Adding knowledge from indicators will enhance the information you get from these strategies. With the rectangle pattern utilized with the moving average lines one can easily detect when a rectangle breakout is about to form and this will make an even more profitable trading experience since early entries will be made. The trading volume trend also compliments this pattern.
Thanks for reading
Steem on
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Unless otherwise stated, the above creenshots are from tradingview.com