Trading Using Rectangle Pattern-Crypto Academy / S5W4 - Homework Post for @sachin08
RECTANGLE PATTERNS
The Rectangle pattern takes its name from the Rectangle shape. The term comes from the fact that the rectangle shape has two long horizontal lines, one at the top and the other at the bottom, and is surrounded by two vertical lines.
Rectangle pattern is a technical analysis that most traders use to predict an asset's next trend. The term "trend" simply refers to price movement in one direction. This might be an upward or downward trend. The rectangular pattern, as used in the crypto world, consists of two horizontal lines drawn at the top and bottom of the price, with the price bouncing up and down and touching both lines.
The price of the asset frequently ranges in order for a rectangle pattern to appear. When I say ranging, I simply mean that some traders will be selling their assets while others will be buying, causing the price of the asset to move in a straight line rather than an uptrend or downtrend, The double bottom reversal pattern perfectly encapsulates the conflict between the bulls and the bears.
There is a consolidation within the rectangle trading pattern, indicating that no one is truly in charge of the market.
When this rectangle is established, it aids traders in identifying the market's next trend movement. As a result, we have a scenario in which a rectangle is formed at the top of the chart, which is known as the rectangle top, and a rectangle is generated at the bottom of the chart, which is also known as the rectangle bottom. The trend is determined purely by where the stated rectangle is formed, be it at the top or bottom, as the case may be.
HOW TO IDENTIFY RECTANGLE PATTERN
In identifying a rectangle pattern, it is of utmost importance that we observe the following.
1.Identify the trend: A price trend is when a price moves in a specific way. A trend, as we all know, can be either bullish or bearish. When we talk about bullishness in trend, we mean the asset's price is moving upward, and when we talk about bearishness in trend, we mean the asset's price is moving downward. To detect the rectangle pattern, both market trends must be absent, i.e. the market must be in a range or the asset price must be moving sideways.
Remember that we need the correct context and that everything has to fall into place for a tradable rectangle breakout to happen. As a result, prior to the rectangle price formation, the first stage is to determine the market trend.
The rectangle is formed because the price movement here is neither bullish nor bearish, as shown in the screenshot above.
CAN WE MAKE USE OF TECHNICAL INDICATORS WITH THE RECTANGULAR PATTERNS?
To acquire accurate results, we can employ technical indicators. We can combine a variety of technical indicators with a rectangle pattern. There are indicators that are based on momentum, trend, oscillator, or volume. Volume-based indicators or momentum-based indicators, in my opinion, will fit the pattern and provide accurate results. Volume-based indicators are my preference. The reason for this is that when the rectangle is about to split, volume is very essential.
I'll be using the RSI indicator, which is excellent at identifying breakout points and overbought areas, as well as a bullish and bearish season. With this information, users can place a buy or sell transaction.
So, first and foremost, I'll locate my ranging market and place my resistance at the top, causing the asset's price to bounce off and reach the support level right below. Identify my breakout, or the winner of the ongoing conflict, during the range phase. This breakout can be upward or downward trending. When it's in an uptrend, the buyers have triumphed over the sellers, and when it's in a downtrend, the sellers have triumphed over the buyers.
The indicator clearly illustrates the ranging market in the screenshot below, with no discernible pattern. It also illustrates the breakout that leads to the overbought zone at 72
RECTANGLE TOP
Rectangle tops are usually generated following a bullish price movement in an asset. This indicates that in order to recognize a rectangle top pattern, one must first detect an uptrend movement in the chart.
As you can see in the screenshot above, a long bullish trend movement has occurred before the rectangle top is established. As I previously stated, this is dependant on the sort of trend that has occurred.
RECTANGLE BOTTOM
The rectangular bottom is typically created after a bearish price action in an asset. This indicates that in order to recognize a rectangle bottom pattern, one must first detect a downtrend movement in the chart.
As you can see in the screenshot above, a long bearish trend movement has occurred before the rectangle bottom is established.
FULL TRADE SETUP USING RECTANGLE PATTERN
BUY TRADE
I have been able to set up a buy trading setup for the asset pair ETHUSD in this illustration. I was able to determine my break point, which is indicated on the chart, as well as my stop loss and take profit levels. My top and bottom horizontal lines are in place on the chart, and the price of the asset, as you can see, bounces up and down. As we can see from the chart above, the breakout signals the start of a new trend.
SELL TRADE
I've set up a sell trading setup for the BTCUSD asset pair as shown in the screenshot above. My break point, as indicated in the chart, has been identified, as well as my stop loss and take profit levels. My top and bottom horizontal lines are all in place on the chart, and the asset's price swings up and down as you can see. As we can see from the chart above, the breakout signals the beginning of a new trend.
CONCLUSION
When it comes to trading, I believe patterns are quite important; recognizing the appropriate pattern can help a trader make a lot of money in the crypto sector. The rectangle pattern is one of the patterns that can assist many traders in determining when it is best to sell and when it is best to buy an asset.