Rectangle Swings and Other Similarities and Differences

Rectangle Swings Within the Range Can Be Traded

Some chartists trade the swings within such a pattern by buying dips near the bottom and selling rallies near the top of the range. This technique enables the short term trader to take advantage of the well defined price boundaries, and profit from an otherwise trend less market. Because the positions are being taken at the extremes of the range, the risks are relatively small and well defined. If the trading range remains intact, this countertrend trading approach works quite well. When a breakout does occur, the trader not only exits the last losing trade immediately, but can reverse the previous position by initiating a new trade in the direction of the new trend. Oscillators are especially useful in sideways trading markets, but less useful once the breakout has occurred for reasons discussed later.

Other traders assume the rectangle is a continuation pattern and take long positions near the lower end of the price band in an uptrend, or initiate short positions near the top of the range in downtrends. Others avoid such trend less markets altogether and await a clear cut breakout before committing their funds. Most trend-following systems perform very poorly during these periods of sideways and trend less market action.

Other Similarities and Differences

In terms of duration, the rectangle usually falls into the one to three month category, similar to triangles and wedges. The volume pattern differs from other continuation patterns in the sense that the broad price swings prevent the usual drop off in activity seen in other such patterns.

The most common measuring technique applied to the rectangle is based on the height of the price range. Measure the height of the trading range, from top to bottom, and then project that vertical distance from the breakout point. This method is similar to the other vertical measuring techniques already mentioned, and is based on the volatility of the market. When we cover the count in point and figure charting, we'll say more on the question of horizontal price measurements.

Everything mentioned so far concerning volume on break­outs and the probability of return moves applies here as well. Because the upper and lower boundaries are horizontal and so well defined in the rectangle, support and resistance levels are more clearly evident. This means that, on upside breakouts, the top of the former price band should now provide solid support on any sell offs. After a downside breakout in downtrends, the bottom of the trading range (the previous support area) should now provide a solid ceiling over the market on any rally attempts.