A Rectangle is a method of pattern trading based on a continuation pattern.
Continuation patterns also include Ascending Triangles, Descending Triangles, Wedges, Flags, Symmetrical Triangles and Pennants and are essentially technical patterns that are expected to lead to the continuation of an existing trend. Continuation patterns are considered a powerful trading tool as they usually result in extremely low risk trading opportunities and spectacular returns.
The rectangle pattern generally reflects a consolidation period, usually of four to six weeks duration. This pattern regularly features well defined support and resistance levels, which are to be distinguished by horizontal lines.
Upon breakout the Rectangle is most likely to continue the existing trend, however a failure to do so will deflect the rectangle from a continuation pattern to a reversal pattern leading to a downward trend, this is a relatively easy pattern to spot however as it will show in a minor sideways trend.
If the rectangle continues to follow an uptrend, with breakout occurring on the upside then the rectangle is referred to as bullish, is the trend is reversed with the breakout occurring on a downtrend, or continuing in the original trend then the rectangle will be called bearish.