Becoming Who You Want To Be

The rectangle is sometimes referred to as a channel or a consolidation. It is a very well known and easily recognized chart pattern that has been used by many successful traders over the years, including Nicolas Darvas who made over $2 million in the stock market using a variation of the rectangle he called a Darvas box. A rectangle is formed when the price action is contained within two lines. Both the top line and bottom line are close to horizontal and the two lines are parallel.

Rectangles, Unpredictable But Profitable

Rectangle breakouts show a slight bias to the upside with patterns breaking up 54% of the time. This upward bias is likely due to the overall bullish bias of the market as the symmetrical nature of the pattern does not clearly indicate a breakout direction. The breakout of rectangles can deliver strong returns with 56% of the patterns being profitable. The average return for the long trades is 1.15% in 12 days.

Specific Setups to Improve Profitability

A break to the upside works better in a rising or consolidating market. By using filters that require the market, sector and stock to be in a consolidation or an up trend you can improve the results.

The location of a breakout from a rectangle is unimportant. If it breaks out early in the pattern it will produce similiar results as if it breaks out later. Patterns that have a length of between 10 days ? 35 days produce better returns.

If the volume is in support of the breakout the results are better. Supportive volume means the volume on the way up is higher than the volume on the way down. The best results are achieved if the high is higher or equal before the breakout and do not trade patterns that are formed around an outside day candle.

Rectangles Can Be Very Profitable

You can improve your trading results by using a series of simple filters that have been outlined here. This select group of rectangles delivers an average profit of 1.89% in 13 days and is profitable on a very high 71% of the trades. Overall this makes rectangles attractive to trade.

Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 – 2008.