WHAT IS A 'Rectangle'

Rectangle is a financial term used to describe a specific pattern securities form on a chart.


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 ā€œUā€ shape and then shows a slight downward drift, typically demonstrating a low trading volume.

  1. Continuation Pattern

    A continuation pattern suggests that a trend in a security price ...
  2. Technical Analysis

    Technical analysis is a trading discipline employed to evaluate ...
  3. Confirmation On A Chart

    Confirmation on a chart is the term used to describe a chart ...
  4. Rising Bottom

    Rising bottom is a pattern on a security's chart, considered ...
  5. Rounding Bottom

    A rounding bottom is a chart pattern used in technical analysis ...
  6. Gartley Pattern

    The Gartley pattern is a complex chart pattern, based on Fibonacci ...
Related Articles
  1. Trading

    Continuation Patterns: An Introduction

    Learn the most common varieties of continuation patterns and how they work in market analysis.
  2. Trading

    Analyzing Chart Patterns

    Learn how to evaluate a stock with a few easy-to-identify chart patterns.
  3. Investing

    Sector Headwinds Buffeting First Solar (FSLR, TAN)

    First Solar has entered a new downtrend after failing to break out above two-year resistance.
  4. Investing

    Market Reversals and How to Spot Them

    Learn what market reversals are and a method that can be used to spot and trade them, called the sushi roll strategy.
  5. Trading

    Stock Chart Patterns to Keep an Eye On

    Some of these stocks are exhibiting big chart patterns, so a breakout is likely to be significant.
  6. Trading

    Intro to Types of Trading: Technical Traders

    Explore in detail the technical trading approach, which looks to the past to predict the future.
  7. Trading

    Most Commonly Used Forex Chart Patterns

    Greatly improve your forex trading by learning these commonly used forex chart patterns that provide entries, stops and profit targets.
  8. Trading

    Inverse Head and Shoulders Patterns Breaking Out

    Watch for higher prices if these stocks complete inverse head and shoulders patterns (a bottoming pattern).
  1. What are the differences between patterns and trends?

    Learn the difference between a pattern and a trend. Explore how technical analysts use patterns and trends to identify trading ... Read Answer >>
  2. What are the differences between a bar chart and candle sticks?

    Explore the difference between bar and candlestick charts. Learn how technical analysts use charts in the analysis of supply ... Read Answer >>
  3. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
Trading Center