Trading Using Rectangle Pattern - Crypto Academy / S5W4 - Homework Post for @sachin08".
Greeting to you all, it is a privilege once more to bring to you another post of my homework in Crypto Academy, especially on this sensitive topic on Trading Using Rectangle Pattern thought by Prof. @sachin08. This homework post is guided by the following questions.
Explain Rectangle Pattern in your own word.
How to identify Rectangles. Explain with Screenshots.
Can we use indicators with this pattern to get accurate results? Explain with Screenshots.
Explain Rectangle Tops and Rectangle Bottoms in your own words with Screenshots of both patterns.
Show full trade setup using this pattern for both trends. ( Entry Point, Take Profit, Stop Loss, Breakout)
Conclusion
A rectangle shows a period of indecision between buyers and sellers in the market. It is a kind of struggle, where buyers and sellers want to take over the market, but neither of them is taking over. The price will test the support (the bottom line) and resistance (the top line) levels severally before a breakout occurs. The price could then trend to the breakout direction whether upward or downward. In the example below, it can be clearly seen that the market was bounded by two price levels that were parallel to each other. In such a market situation, traders just have to wait until there is a breakout then they can enter the market to take profit.
EXAMPLES OF RECTANGLE PATTERNS
1. BEARISH RECTANGLE. A bearish rectangle is form when prices consolidate for awhile during a downtrend1. This happens because sellers run out of strength and needed to gather momentum before taking over the market. In this example, prices broke the bottom (support) line of the rectangle and continue to go down.
2. Bullish Rectangle. After an uptrend, the price is pulse to consolidate a bit, then started going up. In a bullish, price break the top (resistance) line of the rectangle and continues upward. Just like the bearish rectangle, once the prices break the top level, it will usually make a move that is at least like the volume of it previous range.2
As seen above, rectangle patterns show a moment of indecision in the market. In moments like this, buying and selling forces are in a balance. So, price can breakout in either direction. But there's a greater chance that prices can breakout in the same direction as the previous trend. When this happened, then we have a continues price pattern because it continues the movement in the same direction.
There are two main variety of rectangle patterns, the narrow range and the wider range rectangle patterns. The main difference is in the height of the pattern. The wider the range, the more volatile the pattern, and the more it can lead to a trend reversal. And the more narrow the range, the more likely the trend will continue in the same direction as the trend after a breakout.
To identify a rectangle pattern as seen in the example of the narrow range above, you will notice a trend taking a pullback as buyers and sellers are building up their strength for the next move. This means that to identify a narrow range rectangle pattern, you will see prices testing the support (the bottom line) and resistance (the top line) levels severally (possibly equal to or more than 2 times) before a breakout occurs in the same direction as the prior trend.
On the other hand, in the wider range rectangle pattern, buyers and sellers are not certain of the direction of the market. And in this case, there just trade within the range. During the wider range, there are likely to be more false breakouts as seen in the screenshot above than real breakouts. The main idea is for traders to position themselves strategically and enter the market just as a big move is likely to happen. Or use technical indicators to be more accurate in entry the market.
Though it seem irrelevant to use indicators while using rectangle patterns trading, it is logically correct to use indicators, together with the rectangle pattern while trading if the trader wants to get an accurate result.
In the example above, I used the RSI indicator to analyze the market structure and as you can see, when prices breakout on the rectangle, the RSI indicator break below the 30 oversold region showing that there will be a reversal in the market direction. And it happened as seen on the screenshot above.
The concept of trend in trading is very crucial in rectangle patterns because it helps us to determine rectangle tops and bottoms. Rectangle Tops are form at the top of an uptrend, while rectangle bottoms are form at the bottom of a downtrend.
Rectangle Tops. This kind of formation comes when buyers and sellers are at a point of indecision in the market usually at the top of an uptrend. During this period, price volume tend to move back and further away from the previous position over the length of the rectangle.
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As seen in the screenshot chart above, we see prices making an upward move, then a consolidation sets in, forming a rectangle. While this happened, you see prices making a back and further movement between the top line (resistance line) and the bottom line (support line) till a breakout challenges the formation by pointing out the new trend direction.
Rectangle Bottom. This type of pattern introduces an uptrend market structure. It is usually form at the bottom of a downtrend. Same like the rectangle top, price volume tend to move back and further away from the previous position over the length of the rectangle until there's an eventual breakout showing the new trend direction as evident in the chart below.
In this lesson today, I learned about Trading Strategy using Rectangle Pattern. I believe with this strategy, I can enter the market and make profit while trading. All thanks to Prof. @sachin08.
Hello Prof. @sachin08 please this is day three and you have not evaluated my homework