Chapter 14, Part V. Rectangles. Page 2

Bullish rectangle

Commander in Pips: You can see on chart #3 – the context for its appearing is the same. The market shows a nice move up and then turns to some consolidation to take a breath. Then it shows an excellent breakout and continues its move up.

Chart #3 | Weekly JPY/USD. Bullish Rectangle


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Commander in Pips: Now let’s discuss how to trade rectangles and some nuances of their trading.


Trading Rectangles

1. The target of rectangle, almost as with a wedge pattern, usually equals the height of rectangle itself in the direction of breakout. So, I’ve marked for you this distance on charts #2 and #3 and the market easily has reached it. Some traders use as a target double the height of rectangle. But the one height is the nearest target, the most probable one;

2. As we can see rectangles could be a continuation or a reversal. In reality we don’t know it in advance. That’s why it safer to wait until a breakout will happen and only after that pull the trigger. Although sometimes the market gives an early signs of its intentions.

3. The market very often shows fake breakouts of Rectangles. In classical books it is called a “bear trap” if it was a failed downward breakout or a “bull trap” if it was upward breakout failure. By the way, you can see a “bull trap” on Chart #2. This is some kind of Wash&Rinse. If the market shows a breakout failure and returns back into the body of rectangle – usually with great probability the market will reach the opposite border of rectangle. So, you may open positions in the opposite direction to a fake breakout when the market will return inside the rectangle’s body with a stop beyond the extreme of the breakout. Say, on chart #2 you could enter Short after the market has closed inside the body of the rectangle with stop above the high in circle. Near the lower border of the same chart you may see shallow “bear trap” that also has led to a move to the upper border of rectangle.

Usually it could happen if some Fib extension that based on ABC pattern inside rectangle gives 0.618 or 1.0 extension targets slightly outside the border of rectangle.