Rectangles have been very popular with traders over the years trading the chart pattern when it breaks out in either direction. A rectangle is defined by two lines, one on the upper boundary of the price movement and one on the lower boundary, both of which are horizontal. The lines are parallel. These can be referred to as consolidations or channels, or the well known Darvas Box, used by Nicolas Darvas to make $2 million in the markets.

Rectangles, Not Usually Traded Short

Rectangles are definitely not one of the most predictable patterns that are available to trade short. With just 46% of the patterns breaking down rectangles also don’t deliver good returns when they do. The average gain is negative, -0.03% in 10 days with less than half of the breakouts (42%) being profitable. These results aren’t great, but selecting the right conditions can make trading rectangles better.

Specific Setups to Improve Profitability

Short breakouts from rectangles work better in very specific market conditions. The market should be in an up trend or consolidating. The sector should not be in a consolidation, but the stock should be consolidating for the best results when trading rectangles short.

A breakout from a rectangle is best if the pattern is not formed by a large candle touching both boundaries. This does not happen very often. The best trades occur if the stock has lower highs and does not have a close equal to the previous day, before the breakout occurs.

Ensure that the volume is supportive of the breakout, i.e. volume as the stock falls is greater than volume as the stock rises.

Rectangles Can Be Profitable

You can improve your trading results by using a series of very specific filters that have been outlined here. It is highly likely that these results have been achieved by tightening the filters too much and this is unlikely to be a robust trading strategy. This select group of rectangles delivers an average profit of 1.07% in 13 days and is profitable on 63% of the trades. Overall there are more attractive patterns to trade on the short side.

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

Jeff Cartridge is a private trader and created the website LearnCFDs.com Discover Patterns of Success

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