WHAT IS A Rectangle
Rectangle is a financial term used to describe a specific pattern securities form on a chart.
BREAKING DOWN Rectangle
A rectangle is a technical analysis pattern made on a chart. The term refers to an instance in which the price of a security is trading within a bounded range where the levels of resistance and support are parallel to each other, resembling the shape of a rectangle. This pattern signals that the price movement, which has stalled during the pattern, will trend in the direction of the price breakout of the bounded range.
The bounded range, or rectangle, generally occurs in periods of market consolidations, when investors may suffer from indecision. In a rectangle pattern, investors will see the price of the security test the levels of support and resistance several times before a breakout. Once the security breaks out of the range, in either direction, it is considered to be trending in the direction of the breakout. An investor can successfully trade in a rectangle formation by buying at support and selling at resistance. Another technique involves waiting for when the securities break out from the formation.
The Rectangle Formation and Price Patterns in Classical Technical Analysis
The rectangle is a specific type of price pattern used in technical analysis. Investors use technical analysis as a trading tool to evaluate securities. Technical analysis helps traders identify trading opportunities using statistical analysis, like price movement and volume. Those statistics then produce patterns, and those distinctive formations are named, like the rectangle. Technical analysis differs from other investment analysis procedures such as fundamental analysis, which relies on a security's intrinsic value to guide investments.
The patterns in technical analysis are distinctive shapes that the movement of security prices forms on a chart. Following these prices over time, and using the shape to predict future security prices, defines technical analysis. In the financial industry, individual investors who track these movements are called chartists. A chartist refers to any individual who makes use of a security's historical prices in forecasting its future trends.
Also known as trading patterns, these price patterns can occur at any point in time, though they are obviously much easier to identify in hindsight than in real time. In addition to the rectangle, another common pattern is the cup and handle, named after its physical resemblance to a cup with a handle. The cup part of the pattern makes a “U” shape and then shows a slight downward drift, typically demonstrating a low trading volume.