Price Action Classic Patterns
Knowledge of current economic events is a fundamental element of effective trading. In the case of currency pairs and indices, the ability to use the calendar is already satisfactory. Nevertheless, to assess market sentiment, it is worth following current events. In the case of instruments such as shares, tracking information from companies is a necessity.
Bearish Rectangle Pattern
Formation: Bearish Rectangle Pattern
The Bearish Rectangle pattern is a continuation pattern that suggests the continuation of a downtrend. It forms when the price action consolidates within a rectangle-shaped pattern after a prolonged downward movement. This pattern indicates that neither the buyers nor the sellers are in control, and it usually ends with a breakout to the downside.
What the formation looks like:
Upper and lower trendlines: The price oscillates between two parallel trendlines, forming a rectangle pattern.
Horizontal support and resistance: The top and bottom of the rectangle act as horizontal support and resistance levels, respectively.
Consolidation phase: The price consolidates within the rectangle pattern, with no clear direction.
Key points about the formation:
Duration: The longer the rectangle pattern persists, the stronger the subsequent breakout is expected to be.
Volume: Volume tends to decrease during the consolidation phase, indicating a lack of interest from traders.
Breakout direction: The breakout from the rectangle pattern usually occurs in the direction of the prevailing trend, confirming the continuation of the downtrend.
How to trade based on this formation:
Confirmation of the formation: Wait for a breakout below the lower trendline as confirmation of the Bearish Rectangle pattern.
Entering the trade: After the formation is confirmed, consider opening a short (sell) position after the breakout below the lower trendline.
Stop-loss: Place a stop-loss order above the upper trendline to minimize risk.
Profit target: The height of the rectangle pattern can be used to estimate the potential price move after the breakout.
Market context and confirmations:
Confirmation with other tools: Before entering a trade, confirm the Bearish Rectangle pattern with other indicators such as moving averages, oscillators (e.g., RSI, MACD), or candlestick patterns.
Market context: Ensure that the Bearish Rectangle pattern appears in the right market context. For example, if it appears after a prolonged downtrend, it is more reliable.
The Bearish Rectangle pattern can be a useful tool in technical analysis for identifying potential continuation of downtrends. However, like any pattern, it requires confirmation and context. Using additional tools and understanding the market context can increase the reliability of this pattern.
