A rectangle pattern is a chart pattern where price moves sideways between a flat support level and a flat resistance level, which shows a balance between buyers and sellers. A rectangle chart pattern is usually a continuation pattern: a bullish rectangle forms during an uptrend and a bearish rectangle forms during a downtrend.
Traders use 2 main strategies to trade a rectangle pattern: 1) range trading, which buys near support and sells near resistance, and 2) breakout trading, which enters when a candle closes outside the rectangle, with a price target set by projecting the vertical height of the rectangle from the breakout.
What Is a Rectangle Pattern in Trading?
A rectangle pattern is a technical chart pattern where price moves between parallel, horizontal support and resistance levels for a period of time. Each time price rises to resistance, sellers push price back down, and each time price falls to support, buyers push price back up.
The repeated touches of support and resistance draw a rectangle on the chart, which is why traders also call a rectangle pattern a trading range, a consolidation zone or a box pattern. A rectangle chart pattern shows market indecision: buyers and sellers are roughly equal in strength, so neither side can push price out of the range until one side wins and a candle closes outside the rectangle in a breakout.
The rectangle pattern is one of the classical price patterns of technical analysis, described by Richard W. Schabacker and later by Robert D. Edwards and John Magee. Traders find rectangle chart patterns on forex, stock, index and commodity charts, and on timeframes from intraday charts to weekly charts.
How Do You Identify a Rectangle Chart Pattern?
A rectangle chart pattern has 5 features that traders check before trading the range: 1) a prior uptrend or downtrend, 2) at least 2 swing highs at about the same price, which form resistance, 3) at least 2 swing lows at about the same price, which form support, 4) flat, parallel support and resistance lines, and 5) volume that usually declines while price stays inside the rectangle.
| Feature | What the feature looks like on the chart |
|---|---|
| 1) Prior trend | An uptrend or a downtrend before the rectangle starts |
| 2) Resistance | At least 2 swing highs at about the same price |
| 3) Support | At least 2 swing lows at about the same price |
| 4) Shape | Flat, parallel support and resistance lines |
| 5) Volume | Usually declines while price stays inside the rectangle |
The swing highs and swing lows of a rectangle pattern only need to be reasonably close in price, and touches that alternate between resistance and support make the rectangle easier to spot. Support/Resistance (S/R) levels that price returns to again and again are called major support and resistance levels, and traders draw these levels as horizontal lines, unlike the diagonal trendlines used for triangles and channels.
A rectangle pattern can last from a few weeks to several months, and a longer rectangle usually leads to a stronger breakout. On a daily chart, a flat range that lasts less than about 3 weeks with a prior trend and breakout in the same direction is usually identified as a flag instead. We will discuss how to differentiate rectangle chart pattern and flag pattern in detail below in this article.
Volume usually shrinks while price moves inside a rectangle pattern. When volume inside the rectangle is choppy instead, that’s why some traders compare the volume on rallies to resistance with the volume on drops to support, because the side with heavier volume can hint at the breakout direction.
| Important: A rectangle pattern with fewer than 2 touches on both support and resistance is not confirmed yet, and a breakout from that range has a much higher chance of becoming a fakeout (also known as a fake breakout). |
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What Are Bullish and Bearish Rectangle Patterns?
Rectangle patterns come in 2 types, and the prior trend decides the type: 1) the bullish rectangle, which forms during an uptrend, and 2) the bearish rectangle, which forms during a downtrend.
What Is a Bullish Rectangle Pattern?
A bullish rectangle pattern forms when price pauses in a flat range during an uptrend while buyers take a break before the next push higher. Traders expect an upside breakout, and a bullish rectangle chart pattern is confirmed when a candle closes above resistance.
A bullish rectangle trade has 3 parts: 1) a buy order above resistance, 2) a stop-loss below support or at the midpoint of the rectangle, and 3) a price target equal to resistance plus the vertical height of the rectangle.
What Is a Bearish Rectangle Pattern?
A bearish rectangle pattern forms when price pauses in a flat range during a downtrend while sellers take a break before the next push lower. Traders expect a downside breakout, and a bearish rectangle is confirmed when a candle closes below support.
A bearish rectangle trade has 3 parts: 1) a sell order below support, 2) a stop-loss above resistance or at the midpoint of the rectangle, and 3) a price target equal to support minus the vertical height of the rectangle.
Is a Rectangle a Continuation or Reversal Pattern?
A rectangle is usually a continuation pattern, because price tends to leave a rectangle in the same direction as the trend that came before the rectangle. A rectangle can also act as a reversal pattern when the rectangle forms at the end of a long trend and price breaks out in the opposite direction.
A rectangle pattern is neutral until the breakout. Inside the rectangle, buyers may be building buying positions (accumulation) or sellers may be unloading positions (distribution), and the breakout shows which side won.
A rectangle is more likely to act as a continuation pattern when the prior trend is only a few months old, and less likely when the prior trend is very mature. Because either breakout direction is possible, traders wait for a candle to close outside the rectangle before choosing a direction for the trade.
What Are the Main Rectangle Pattern Trading Strategies?
Traders use 2 main strategies to trade a rectangle pattern: 1) range trading inside the rectangle and 2) breakout trading, with a price target set by projecting the vertical height of the rectangle from the breakout.
1) Range Trading Inside the Rectangle
Range trading a rectangle pattern means buying near support and selling near resistance while the rectangle holds, and some traders also sell short near resistance and buy back near support. Each range trade needs a stop-loss just outside the rectangle, because every rectangle ends with a breakout that can run straight through a position placed inside the range.
Range trading a rectangle carries 2 extra risks: 1) spread costs take a large share of a narrow rectangle, and 2) a stop-loss just outside the rectangle can be hit by a fakeout or by spreads widening around news releases. On a 30-pip rectangle, a 1.5-pip spread uses about 5% of the move from support to resistance before any commission is paid.
2) Breakout Trading
Breakout trading a rectangle means waiting for a candle to close outside the rectangle and then entering a trade in the direction of the breakout. Breakout trading is the more common way to trade a rectangle pattern, because the move after a confirmed breakout is often at least as large as the vertical height of the rectangle.
How Do You Trade a Rectangle Breakout Step by Step?
A rectangle breakout trade follows 5 steps: 1) confirm the rectangle breakout, 2) enter the trade on the breakout or the retest, 3) place the stop-loss, 4) set the price target with the measuring principle, and 5) manage the trade beyond the price target.
Step 1: Confirm the Rectangle Breakout
A rectangle breakout is confirmed when a candle closes outside the rectangle: above resistance for an upside breakout, or below support for a downside breakout. A candle that only pokes outside the rectangle and closes back inside the rectangle range within the same candle is not a real breakout.
Another way of confirming the trade is to wait for 3 candles to close outside the rectangle before entering a trade. The third way of adding confirmation signal to the strategy is to only consider a breakout candle that comes with an increase in volume on the breakout candle. The last way is to confirm using the relative strength index (RSI) crossing above 50 during an upside breakout to show momentum moving with the breakout.
A fakeout happens when a candle closes outside the rectangle and price then returns inside the rectangle, trapping traders who entered on the breakout. Spot forex has no central exchange volume, so MT4 and MT5 show tick volume, which counts the price changes inside each candle, and forex traders read breakout volume on tick volume.
| Pro Tip: On MT4 and MT5, read breakout volume on tick volume, and treat a breakout candle with tick volume below the recent average as a likely fakeout. |
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Step 2: Enter the Trade on the Breakout or the Retest
Traders enter a rectangle breakout trade in 1 of 2 ways: 1) at the close of the breakout candle, or 2) on a retest, when price comes back to the broken level after the breakout. After an upside breakout, broken resistance often turns into support, and after a downside breakout, broken support often turns into resistance.
Entering on the retest gives a better entry price and a closer stop-loss, but price does not always come back to the broken level, so some trades are missed. Some traders instead place a buy stop order a few pips above resistance (or a sell stop order a few pips below support), which fills as soon as price moves outside the rectangle but also fills on fakeouts and can fill with slippage during news releases.
Step 3: Place the Stop-Loss on the Rectangle Trade
Traders use 3 stop-loss placements on a rectangle breakout trade: 1) just inside the rectangle, a few pips back past the breakout level, 2) at the midpoint of the rectangle, halfway between support and resistance, and 3) a safer stop-loss a few pips beyond the opposite side of the rectangle.
A stop-loss closer to the entry allows a larger position size for the same account risk, but retests or normal price fluctuations can hit those stop losses.
A safer stop-loss beyond the opposite support/resistance line survives retests and normal swings, but the safer stop-loss needs a smaller position size to maintain the same risk-reward ratio. Weekend gaps and news releases can make price jump past any stop-loss, so a rectangle trade can close at a worse price than the stop-loss level.
Step 4: Set the Price Target With the Measuring Principle
The measuring principle sets the price target for a rectangle breakout: measure the vertical height of the rectangle, which is the distance between support and resistance, and project that distance from the breakout point in the direction of the breakout. For an upside breakout, the price target is resistance plus the vertical height of the rectangle, and for a downside breakout, the price target is support minus the vertical height of the rectangle.
For example, a rectangle with support at 1.1000 and resistance at 1.1050 has a vertical height of 50 pips, so the price target is 1.1100 after an upside breakout and 1.0950 after a downside breakout.
The price target from the measuring principle is a minimum price target, and price often moves further, especially after a rectangle that lasted several months. Price can also fall short of the price target, because the measuring principle gives a probability, not a guarantee.
Step 5: Manage the Rectangle Trade Beyond the Price Target
Traders who want to stay in a rectangle trade after price reaches the price target use 2 common methods: 1) take partial profits at the price target and let the rest of the position run, or 2) trail the stop-loss behind the swing highs and swing lows.
In a long trade, traders hold while price keeps making higher lows and exit when price makes a lower high and a lower low. In a short trade, traders hold while price keeps making lower highs and exit when price makes a higher high and a higher low.
Rectangle Pattern Trading Example
The EUR/USD 4-hour chart in this example shows a rectangle pattern acting as a reversal pattern. The rectangle formed through July after a downtrend that took EUR/USD from about 1.1800 in May to about 1.1330 in late June, so traders expected a bearish rectangle with a downside breakout, but price broke upward instead.
EUR/USD 4-hour chart: rectangle pattern between 1.1378 and 1.1450, upside breakout at the end of July, and price target at 1.1519.
The EUR/USD rectangle produced 2 fakeouts before the breakout that held: 1) in mid-July, a few candles closed just above resistance and then fell back inside the rectangle, and 2) in the last week of July, candles closed below support near 1.1350 and then rallied back inside the rectangle. The downside fakeout trapped traders who expected the downtrend to continue.
At the end of July, a large candle broke and closed above resistance at 1.1450, with some of the tallest tick volume bars of the month and the RSI (14) rising from below 50 to above 70. The EUR/USD rectangle acted as a reversal pattern, because the breakout went against the downtrend from May and June.
The vertical height of the rectangle measured on the chart is about 70 pips (69.6 pips), so the price target is 1.1450 + 69.6 pips = 1.1519, marked as Take Profit on the chart. Price reached the price target within days of the breakout, dipped back toward 1.1455 to retest broken resistance, and then climbed to about 1.1710 by late August, about 260 pips above resistance and more than 3 times the vertical height of the rectangle.
The table compares the 3 stop-loss placements for this EUR/USD trade, assuming an entry at 1.1460 on the close of the breakout candle, a $10,000 account that risks 1% ($100) per trade, and a pip value of $10 per standard lot.
| Stop-loss placement | Stop-loss level | Risk | Reward to price target | Risk-reward ratio | Position size |
|---|---|---|---|---|---|
| 1) Just inside the rectangle | 1.1440 | 20 pips | 59 pips | 1:3.0 | 0.50 lots |
| 2) Midpoint of the rectangle | 1.1414 | 46 pips | 59 pips | 1:1.3 | 0.21 lots |
| 3) Safer stop-loss beyond support | 1.1368 | 92 pips | 59 pips | 1:0.6 | 0.10 lots |
The stop-loss just inside the rectangle gives the best risk-reward ratio, but a deeper retest of resistance would have closed the trade at a loss. The safer stop-loss beyond support risks more pips than the price target pays, so that trade only works out if price moves past the minimum price target, as EUR/USD did in August.
Measured from resistance, the midpoint stop-loss sits about 36 pips away against a 70-pip price target, a risk-reward ratio of about 1:2. Entering on the close of the breakout candle 10 pips higher cuts that ratio to about 1:1.3, so the entry price changes the risk-reward ratio as much as the stop-loss placement does.
Traders can practise drawing rectangle patterns and comparing these 3 stop-loss placements on a TMGM demo account in MT4 or MT5 before trading with real money. CFD trading involves significant risk and is not suitable for all investors. You could lose more than your initial deposit.
Rectangle vs Channel, Triangle and Flag: What Is the Difference?
A rectangle, a channel, a symmetrical triangle and a flag all show price moving between 2 boundary lines, and the slope of the lines and the time each pattern takes set the 4 patterns apart.
| Pattern | Boundary lines | What the pattern shows | Typical duration |
|---|---|---|---|
| Rectangle | Flat and parallel | Sideways consolidation, neutral until the breakout | A few weeks to several months |
| Channel | Parallel and sloped up or down | An uptrend or a downtrend | Varies |
| Symmetrical triangle | Converging toward an apex | Consolidation that narrows until the breakout | Varies |
| Flag | Short and parallel, often sloped against the trend | A brief pause in a strong trend | Usually less than 3 weeks |
A channel has parallel lines that slope up or down, so a channel marks a trend, while a rectangle's lines stay horizontal and mark a sideways range. A symmetrical triangle is the closest relative of the rectangle, because both are consolidations that stay neutral until the breakout, but a symmetrical triangle's lines converge while a rectangle's lines stay flat and parallel.
A flag looks like a small rectangle and often slopes against the trend, and on a daily chart a flag usually lasts less than 3 weeks. When the same flat range lasts longer than about 3 weeks, traders treat the range as a rectangle pattern.
Rectangle Pattern FAQ
How Long Does a Rectangle Pattern Take to Form?
A rectangle pattern usually takes a few weeks to several months to form, and a longer rectangle tends to produce a stronger breakout. On a daily chart, a flat range that lasts less than about 3 weeks is usually called a flag instead of a rectangle.
What Happens After a Rectangle Pattern Breakout?
After a rectangle pattern breakout, price often retests the broken level and then moves at least the vertical height of the rectangle in the direction of the breakout. Some rectangle breakouts turn into fakeouts and return inside the rectangle, so traders always place a stop-loss.
Can You Trade a Rectangle Pattern in Forex?
Yes, rectangle patterns form on forex charts on every timeframe, and forex traders use the same 2 strategies as stock traders: 1) range trading and 2) breakout trading. Forex traders read breakout volume on tick volume in MT4 and MT5, because spot forex has no central exchange volume.
Is a Rectangle Pattern Bullish or Bearish?
A rectangle pattern is neutral until the breakout. A bullish rectangle forms in an uptrend and usually breaks above resistance, and a bearish rectangle forms in a downtrend and usually breaks below support.
What Is the Difference Between a Rectangle Pattern and a Trading Range?
A rectangle pattern and a trading range describe the same price action: price moving sideways between flat support and flat resistance. Traders call a trading range a rectangle pattern once the range has more than a few touches on support and at least 2 touches on resistance.
