Rectangles are continuation patterns that occur when a price pauses during a strong trend and temporarily bounces between two parallel levels before the trend continues.

As with many chart patterns there is a bullish and bearish version.

In this lesson, we will show you how to identify the bullish rectangle and use it as a possible buying opportunity.

How to identify the bullish rectangle

Bullish rectangles are easier to identify than some other patterns such as pennants.

See the price chart below for an example of what a bullish rectangle looks like:

Bullish rectangle

number_1 Resistance line
number_2 Support line

As shown above, the price rises in a strong uptrend and then starts to consolidate between temporary support and resistance levels.

It continues to move sideways, bouncing between these two parallel lines and forming a box-like shape that gives the pattern its name.

The price then breaks out above the upper resistance level and continues its uptrend.

Now try the following exercises to see if you can identify the bullish rectangle pattern:

Exercise 1: Identify the bullish rectangle Show exercise
Exercise 2: Identify the bullish rectangle Show exercise

How to trade the bullish rectangle: method 1

We will now show you two methods to trade the bullish rectangle pattern.

Enter your trade

As soon as a candlestick has closed above the rectangle's upper parallel line (the resistance level), enter your trade with a long (buy) order.

See the chart below for an example of this:

Bullish rectangle method 1 entry

number_1 Resistance line
number_2 Support line
number_3 Area where price has broken through resistance number_1
el1 Buy order (long entry)

Place your stop loss

Place your stop loss just underneath the rectangle's lower parallel line (the support level).

See the chart below for an example of this:

Bullish rectangle method 1 stop loss

number_1 Resistance line
number_2 Support line
number_3 Area where price has broken through resistance number_1
el1 Buy order (long entry)
sl2 Stop loss

Place your profit target

Measure the height of the rectangle and then place your profit target the same distance above the top of its upper parallel line.

See the chart below for an example of this:

Bullish rectangle method 1 take profit

number_1 Resistance line
number_2 Support line
number_3 Area where price has broken through resistance number_1
el1 Buy order (long entry)
sl2 Stop loss
tp3 Take profit

Now try the following exercise to practice placing your entry, stop loss and take profit according to method 1:

Exercise 1: Place your entry, stop loss and take profit Show exercise

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How to trade the bullish rectangle: method 2

The following is the second method to trading the bullish rectangle.

Enter your trade

As with method 1, wait for a candlestick to close above the upper parallel line, breaking the rectangle's resistance.

Then, wait for the price to retest the upper line – this broken resistance level now turns into a support – and place your buy order.

See the chart below for an example of this:

Bullishrectanglestoptop

number_1 Resistance turned support
number_2 Support
el1 Buy order (long entry)

Place your stop loss

Place your stop loss just underneath the rectangle's upper parallel line (the old resistance level that has now turned into a support)

See the chart below for an example of this:

Bullishrectanglestopbottom

number_1 Resistance turned support
number_2 Support
el1 Buy order (long entry)
sl1 Stop loss

Place your profit target

As with method 1, measure the height of the rectangle and then place your profit target the same distance above the top of its upper parallel line.

See the chart below for an example of this:

Bullishrectangletp

number_1 Resistance turned support
number_2 Support
el1 Buy order (long entry)
sl1 Stop loss
tp1 Take profit

Now try the following exercise to practice placing your entry, stop loss and take profit according to method 2:

Exercise 1: Place your entry, stop loss and profit target Show exercise

Summary

In this lesson you have learned that ...

  • ... bullish rectangles are continuation patterns that occur when a price pauses temporarily during an uptrend – they offer you a buying opportunity.
  • ... you enter your long trade after the rectangle's upper resistance level has been broken or, in the case of method 2, after it has been broken and then retested.
  • ... you place your stop loss below the rectangle's lower support line or, in the case of method 2, under the higher parallel line once it has turned into a support.
  • ... you place your profit target the same distance above the rectangle's upper resistance level as the distance between the rectangle's two parallel lines.

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  • Hi Naim.bdfx,
    Not all lessons have videos. Some easy to digest lessons are only illustrated text pieces.
    Regards.
    Peter
  • Just to add here that we are working through the content and adding videos as we go along.

    Keep an eye on the hot topics page.
  • He naim.bdfx,

    Just manage you expectations, when I say we are in the process, I mean as a matter of months rather than days.
  • @hindsighthero: Maybe you remember the question I asked in the other thread just two days ago about when to place the entry with the second method. In the example in this post for the second method, the entry is placed right after an orange candle has formed. As far as I understood from your last post, the entry should be placed with the next up-trend, so with the next blue candle. Could you clarify that? Thanks!
  • Hi Buulow,
    Well spotted. It is really up to the trader. The example you have seen at the falling wedge is a more conservative approach. It means you have a higher probability but you get a worse price. This example above is rather aggressive: you get a better price, but there's no confirmation for your entry.

    Which one you choose is up to you. The conservative strategy is better if you struggle to take losses, because aggressive techniques imply larger and more prolonged drawdown periods.
    Regards.
    Peter
  • Please correct the answer of the last question in the following quiz. The correct take profit level to place after a retracement entry is marked as wrong. While you are at it... all the correct answers in the following quiz are the second option.
  • Hi Isin,
    I have had a look, and based on the rule of setting Take Profit (ie. measure the height of the rectangle and then place your profit target the same distance above the top of its upper parallel line) the answer of the last quiz question is correct as it is.
    Let me know if it makes sense to you.
    Regards.
    Peter
  • Thank you Peter,
    It does make sense that since a retracement entry as described in method 2 is more conservative approach than trendline breakout entry, this take profit level makes sense. I had the feeling that a tight rectangle such as the one in the example would probably yield a tall breakout, in that case a full retracement to the trendline if in the form of a long tail candle allready leaves less room for profit taking, since we enter at the close of the retracing candle.
    Perhaps a good strategy would be to TP with a portion of the order at the prescribed level while letting the remaining portion of the order to continue while moving the SL to breakeven at the order entry level.
    Thank you once again for your reply,
    Best,
    Isin
  • If there any significance of knowing the previous day's high or low, and if so, what is it?
  • Hi Lloydie,
    They do tend to act as support and resistance and can indicate short term direction, if they are broken.
    Regards.
    Peter
  • Thank you Peter. Here is hoping you will have a wonderful week end.
  • Hi Lloydie,
    Thank you, wish the same for you.
    Regards.
    Peter
  • For this pattern (just like all of the others), the trading suggestion is to wait until it breaks out to trade it. Obviously this is on the riskier side but is there ever a time, where it's worth getting in before the breakout? Assuming the pattern continues and you do get the breakout, that could allow you a higher return. Thanks!
  • Hi m123mikmik,
    Yes, there is, but maybe not where you think. If you want to trade the breakout you should never buy right underneath the resistance, but you can always buy at the nearest support. See the example of this lesson. USDJPY, 4h chart. If you go down to 1H and buy at the double bottom, you can take first profit or move stop to break even at the top line of the rectangle and ride the breakout higher:
    http://i.imgur.com/nxAcx5z.png
    Regards.
    Peter
  • Peter,

    That makes sense. It makes for an appropriate risk / reward. Appreciate your thoughts on this.

    Regards,
    Mike
  • Please check question N° 5 of the quiz, it ask us to asume we are using the second strategy, and asks whitch would be the take profit point, and then says the correct answer is the take profit that we should use if we were using the first method.
  • Hi Charlangas,
    The TP is the same for both methods, the difference is in the entry points and the stop loss.
    Regards
    Peter

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