The rectangle pattern is a chart pattern that is perfect for binary options. Providing numerous secure trading opportunities, every trader should know this pattern and how to trade it. Even if you do not plan to trade the pattern directly, understanding the formation will greatly increase your market insight.
A rectangle pattern is a temporary sideways movement in a trend. In contrast to an ending trend, however, the pattern indicates that the trend will continue after it has completed the rectangle pattern.
The market creates a rectangle pattern whenever a trend has lost momentum. Running out of steam, the trend takes a break before returning to its main direction. Often, this happens at or near a resistance or support level, where traders get a little more careful. Other patterns occur after a trend move strongly for some time and traders are no longer able to invest enough to keep this momentum alive.
To overcome this resistance or support, the market will move sideways for some time. If the lower range of this sideways movement is relatively constant, we speak from a rectangle pattern.
After enough traders have overcome their caution and sold other assets to create new cash, the trend is able to resume its main direction. The lower range of the rectangle works as its own resistance / support, trapping the market between itself and the initial resistance / support that caused the pattern. The market will move between both lines for a while, eventually breaking free in the direction of the initial trend, thereby ending the rectangle pattern.
Being able to distinguish a rectangle pattern from a real ending trend is an important skill for any binary options trader, as it will not only help you to find profitable trading opportunities, it will also help you to avoid making mistakes by investing in reversals that are not real.
A rectangle pattern is not the only pattern that emerges from the market breaking out of two resistance / support levels. A double top, for example, initially looks much like rectangle patterns but has very different implications.
To securely identify the pattern, you should wait until the market tells you that it is complete. When you see the market trapped between two resistance / support levels, wait which level the market breaks first.
Wait for the market to tell you which formation you are dealing with and do not make any assumption.
Even though you should only diagnose a rectangle pattern after it is complete, you can still draw numerous conclusion from a developing rectangle pattern.
When the market is trapped between a resistance and a support level, you know the trading range for future price movements. This knowledge allows you to invest in a binary option when the market is near one side of this trading range:
After the market has completed the patterns, you have more trading opportunities:
To trade the pattern the most effectively, you should also understand other continuation patterns. These patterns are similar to the rectangle pattern, and once a trend moves towards a resistance / support level, knowing which pattern you are dealing with will help you draw the right conclusions.