Studying chart patterns in forex is an important aspect of technical analysis. Understanding price patterns helps you appreciate the direction of an asset’s value. Successful trading involves knowing how to use the knowledge of these movements to anticipate subsequent price movements, resulting in better trading decisions. One of the patterns studied by traders during technical analysis is the bullish rectangle pattern. In this article, you will learn how to identify the bullish rectangle pattern and how to use it during trading decisions.
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What Is a Bullish Rectangle Pattern?
The bullish rectangle pattern is a continuous chart pattern that shows a momentary consolidation in the upward movement of a trend before it resumes again. It is marked by two parallel lines of support and resistance levels. If you’re wondering how to identify a bullish rectangle for forex trading, there are a number of prerequisites traders look out for. Here are a number of them:
- Trend movement: A key thing to note is that this phenomenon is only identified in the aftermath of a previous uptrend. You should see some existing highs and lows before the rectangle formation.
- Line alignment: In the formation of a bullish rectangle, you will notice dual lines of parallel alignment. The lower point of the lines is the support level, and the higher point is the resistance point.
- Bouncing price movements: Between the resistance and the support levels, you will find a bouncing pattern in the price movement, forming a zig-zag formation with 2 or 3 peaks.
Bullish Vs. Bearish Rectangular Patterns
Identifying the disparity between bullish and bearish rectangular patterns is usually confusing for some traders. This is due to the similarity in shape between both scenarios; however, some differences give them their distinct market features.
In a bullish rectangle situation, the chart is observed only during an upward price movement, which continues in the upward movement after a brief pause, known as the period of consolidation. Meanwhile, the rectangle is observed during a downward trend in the bearish rectangle pattern.
Trends are not only the differences between the two; the technical meaning of the parallel lines also differs. These parallel lines indicate two key price levels: the support levels and the resistance levels.
Support level: This is a price point where buying interest is strong enough to stop the price from falling further. It “supports” the price from below and indicates the lower price boundary where buying typically increases.
Resistance level: This is a price point where selling interest is strong enough to stop the price from rising further. It “resists” the price from above and indicates the upper price boundary where selling typically increases.
These levels represent areas where supply and demand forces are particularly strong. When these levels are repeatedly tested and hold, they are considered “significant” support or resistance levels.
In the bullish rectangle pattern, the upper line is the line of resistance, while the lower line is the support level. However, in the bearish rectangle, the upper line is the support level, while the lower line is the resistance level.
Now, consider how to effectively trade using the bullish rectangle pattern.
How To Trade Using the Bullish Rectangle Pattern
The bullish rectangle pattern shows a period where the buying and selling pressures or market demand and supply are roughly balanced, resulting in a price range with less volatility.
In a bullish rectangle pattern, the price bounces between the support and resistance levels, with the expectation that it will eventually break through the resistance level and continue its upward trend.
How To Identify Entry Point and Stop-Loss Point
Generally, there are two ways to trade profitably using the bullish rectangle pattern.
One strategy is to enter the trade just after you observe the trend closing above the line of resistance (the upper line of the bullish rectangle). Then, set the stop loss slightly lower than the support level (the lower line of the bullish rectangle). Measure the rectangle’s height, and mark a point above the resistance level as your profit target. Note that the buy-in of this strategy is a long-order buy.
The second strategy is similar to the first one at the entry point. Traders enter the trade when the candlestick closes slightly higher than the resistance point. The higher point signifies a breakout from the upper line of the rectangle. Then traders wait for the price trend to fall again, rebounding off the upper line, which will now become the support or lower line, before placing an order to buy. In this strategy, the stop loss is set just above the resistance or upper line, which is the support line. To set a profit target, measure the rectangle’s height and place it above the resistance line.
How To Take Measurements for Profit Target
This measuring concept can be used for rectangle patterns and many other charts used during technical analysis. The essence of this concept is to give the trader an idea of a price at which they expect to make minimum profit. The profit target helps the trader wait through moments of little countertrends till prices hit a profit level.
The first step is to define resistance and support levels. If, for example, the support level is $50.5 and the resistance level is $65.5, the next step is to determine the distance between both points. That would be 10 points. Add 10 points to the resistance level (upper line) to measure the profit target, which will bring the total up to $75.5.
You must note that this technique doesn’t guarantee 100% success. At best, the technique only offers a probable outcome. Despite marking a profit target point, you must observe the chart’s price movement for safer decisions.
Risk Management for Bullish Rectangle Trades
In any forex trading activity, risk management helps to protect the loss of investment. In bullish rectangle trades, some ways to mitigate risk include:
- Placing stop-loss orders that inhibit potential losses should the bullish run stop
- Employing the profit target technique where the profit is only two times the height between the stop loss and entry point.
- Deploying the bullish rectangle pattern alongside other forex trading indicators like Moving Averages.
- Trading with only 1–2% of your capital and avoiding emotional decisions.
Why Traders Prefer the Bullish Rectangle Pattern
Many forex traders favor the bullish rectangle pattern due to its simplicity and superb risk management properties. The key is adequately identifying the rectangle, knowing when to enter the trade, defining your profit targets, and monitoring the chart for further decisions. You can also combine the bullish rectangle pattern with other indicators.