Lesson 6: How to Use Rectangle Patterns to Trade Breakouts

Module 1: Types of Forex Charts
Date Published: May 05, 2025
Last Updated: May 05, 2025
3 Minutes
Lesson Overview
How to Use Rectangle Patterns to Trade Breakouts

The battle between the buyers and the sellers dictates the price action. When the buyer overpowers the sellers, a bullish market will form. On the flip side, a bearish market occurs when sellers dominate the market.  

But what if neither the buyer nor the seller wins the battle?  

The price will pause – it enters market indecision. During this indecision, the price bounces back and forth to certain levels (support and resistance) parallel to one another – forming a rectangle pattern.  

In this lesson, you'll learn how to trade price breakouts using the rectangle pattern effectively.

Lesson Overview

  • A rectangle pattern occurs when neither the sellers nor buyers pressure the market – representing consolidation or market indecision.  
  • A rectangle that forms at the peak of an uptrend is called a bullish rectangle, while a bearish rectangle occurs at the bottom of a downtrend.
  • During this pattern formation, the price bounces back and forth to certain levels (support and resistance) that are parallel to one another.  
  • The market test the support and resistance several times before eventually breaking out.  
  • The price pauses for a while, benefiting -term traders because it presents clear entry and exit points for their trades.

Quick Overview: Consolidation vs. Breakout in Forex

In the forex market, consolidation is the type of market environment where the price of the currency pairs trades on a specific range, known as the support and resistance level.  

On the flip side, a breakout occurs when the price trades below the support level or above the resistance level to form its primary trend. This means the price breaks out from the established range, as its name suggests.  

Simply put: A breakout happens after a consolidation.  

Learn more about different breakouts you can spot on this TradeGeek lesson: TradersUnited - Types of Forex Market Breakouts

Support and Resistance Level

The support and resistance (S/R) levels play a very important role in identifying price consolidation and breakout.  

  • The support represents the level where the price has difficulty trading lower. When the price reaches this level, it's expected to bounce back up.  
  • The resistance signifies the level at which the price regularly stops trading higher and dips down.  

S/R levels are the range where the price bounces back and forth during consolidation. When the price trades beyond these levels, the breakout signal is confirmed.

What Is a Rectangle Pattern?

Imagine when you're charting and connecting the highs and the lows – and it forms perfectly horizontal trendlines. But what does this mean?  

The market is currently on pause. It's not following any primary trend and is just trading within its support and resistance levels.  

The indecisiveness of the buyers and sellers forms this pattern. Uncertain about the market's big move, they test the support and resistance several times to gauge the future price direction.  

Are Rectangle Patterns Unprofitable?

A price that's not trending is unprofitable. Well, that's a myth.  

This pattern's stability doesn't directly mean an unprofitable moment for traders. A rectangle pattern provides a clear support and resistance level that you can use for your trades' entry and exit points.

Moreover, the type of rectangle pattern you've seen indicates the future market trend once a breakout happens.  

A bearish rectangle pattern indicates that the price will decline even lower after the consolidation. Meanwhile, a bullish rectangle means the market will have an upward trend after breaking out.  

You'll know the profitable and safe entry and exit points if you correctly spot and trade these patterns. If the market moves based on your findings, you'll run at a nice profit.  

Bullish Rectangle

When the price suddenly stops trading higher and consolidates, it indicates a bullish rectangle formation.  

This happens due to these two primary reasons:  

  • Market indecisions: This happens when sellers put pressure on the market and pull the price down. However, buyers will pull the price back up, making the price bounce up and down.  
  • Accumulation: When traders and investors anticipate a continued upward trend, they accumulate buying positions to increase demand.

Once the pattern is confirmed, the price will continue its upward trend. Typically, you can set the target by measuring the size of the rectangle and plotting it above the resistance level.  

Bearish Rectangle

A bearish rectangle can be found at the bottom of a depreciating market. After the price consolidates, it will continue its downward movement.

Like its bullish counterpart, consolidation happens due to market indecision. However, the distribution phase could also be the reason behind the consolidation – where traders expect a massive sell-off, thus executing short positions.  

If you're selling, you can place the entry point of your short position below the support level – this ensures that you can take advantage of the potential price movement while still being safe in case the signal doesn't push through. 

 

 


 

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