Trading Rectangle Channel Patterns by Suri Duddella Markets provide two types of trading activity: Trending markets or Consolidating markets. Trending periods are obvious as price tends to move in one direction (up or down) without many interruptions whereas consolidation periods are indecisive and cautious as price neither continuing or reversing in a larger price trend. These consolidation periods can last from few days to several months and typically trade within a limited range and offer few trading opportunities. This price balance between bulls and bears leads to the bounded range in which price levels of resistance and support are formed in parallel to each other. This bounded range results in a Rectangular Channel pattern (or A Box Pattern). Rectangle channel patterns consist of two parallel trendlines bounding the price-action having multiple pivot points forming at equal highs and equal lows. As price approaches the lower trendline, bullish sentiment (or bulls) sets to push the price up towards the upper trendline, and when the price reaches the upper trendline, bearish sentiment (or bears) tend to push the price down towards the lower trendline, thus creating a tug-ofwar. Each of these thrusts must form at least two key pivot points on the upper and lower trendlines to create a rectangle channel. This bounded range becomes a consolidation area, where traders are indecisive and may not take trend based trades. Rectangle Channel patterns is one of the popular charting technique and they are reliable chart patterns and do provide precise entry, exit, stop and target trading levels. In general, this type of pattern falls into a broader "Channeling" pattern category along with Ascending channels (rising channels) or Descending (falling channels). In Ascending channels (Rising), the price makes consecutive higher highs and higher lows, whereas, in Descending Channels (Falling), the price makes consecutive lower highs and lower lows. In Rectangle channels, the price makes horizontal (parallel) highs and lows in a box formation. These channel patterns can be both continuous or reversal patterns. The price action inside the pattern itself is considered neutral. Trading Rectangle Channels Rectangle Channel patterns are formed by price action between two key trendlines bound by multiple equal (near) highs and lows. The duration of the pattern can be few days to months. Longer duration patterns are considered to be more reliable. The pattern must have at least two pivots (equal highs or equal lows) on each of the trendlines. The price breakout can occur in any direction from the pattern, but the general belief is price may breakout in the same direction as prior direction before the pattern formation. The volume inside the pattern is non-decisive, but volume tends to increase during the breakouts. Trade: A trade setup occurs when price closes outside the trend line (upper or lower) at least two bars signaling a breakout. Trades are entered on a follow-up bar at high above the breakout bar or low below the breakdown bar. Target: Targets in Rectangle Channel formations are based on the depth of the rectangle pattern. Targets are usually set at 70 to 100% of the depth of rectangle from the trade entry. Stop: Rectangle patterns fail when prices retrace into the middle of the rectangle channel. Place a stop order just below the middle of the channel. Rectangle Channel with upside breakout
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