The rectangle pattern is a very important part of trend analysis. With binary options, a rectangle pattern will offer you many relatively secure trading opportunities. Even if you choose to not use the rectangle pattern for direct trading, you should be able to recognize it, as it will greatly benefit your understanding of market movements.
What is a rectangle pattern?
Most commonly, a rectangle occurs when an uptrend hits a resistance line or when a downtrend hits a support level. In this case, the trend has to overcome the resistance / support before it can continue in its original direction.
For an uptrend, in order to generate enough bullish energy to break through an upper resistance level, the market will enter a phase of sideways movement, also known as lateral consolidation. This means, after the asset has reached the resistance level, price will start to fall. Since there is the still upwards momentum left from the uptrend, prices cannot fall indefinitely. At some point, the market will create a lower support level, thereby completing the rectangle shape of the pattern.
Breaking the rectangle pattern
Now, the price is trapped between the upper resistance level and the lower support level. It will move up and down a few times and test both levels.
Which level it breaks first will determine the future price direction.
In an uptrend, most likely, the asset will continue the previous bullish trend. Therefore, the rectangle pattern is considered a continuation pattern. For a downtrend, the rectangle pattern works the same way. After hitting a support level, the market will be trapped between the lower support and an upper resistance level. It will move up and down, and eventually break out of the rectangle pattern.
How to trade the rectangle pattern
A trader using the rectangle pattern with its unique shape and clearly defined boundaries can come to many conclusions about future price movements.
First of all, the upper resistance and the lower support level allow for a general prediction on whether to invest in rising or falling prices.
Secondly, you can trade the market breaking through the resistance / support. This event will trigger many stop loss orders and buy limit orders, which will generate a strong price movement.
Thirdly, the upper and lower limits allow a trader to invest in a no touch option once the price gets close to one of the lines. Since you know the price is highly unlikely to break these barriers you can confidently invest in any no touch option with a trigger price outside these levels. Of course, a strategy like this will cause you to eventually lose a trade, once the market breaks out of the rectangle pattern. Still, if you invest right, you can win four or five trades for every losing trade, which will grant you a winning percentage of at least 80%.
Of course, the rectangle pattern is very similar to other continuation patterns, the triangle pattern in particular. Once a trend moves towards a resistance / support level, it is therefore important to determine which pattern it will create.
A first indicator can be the vertical incline of the trend. In most cases, steep trends tend to create a rectangle when hitting a resistance or support level, while flatter trends tend to create a triangle. A steep trend line rises too quickly for a trend to generate enough momentum to break through a resistance level by using a triangle.