Cause
A rectangle occurring after a trend is normal. Rectangles are resting
areas. This is an area where the bulls and bears are unable to overcome
one another, resulting in a trendless situation.
Identifying The Rectangle Pattern
Given that rectangles are areas of rest, they should ideally be narrow and tight as shown in the chart below.
Did you notice that the horizontal lines of the rectangles act as support and resistance?
Prices may pierce through the support resistance lines, but the general rectangle pattern is still well respected.
A rectangle can last for as short as a few minutes. Currency traders look for rectangles that last between minutes and days.
Besides varying in duration, rectangle chart patterns also vary in height.
A rectangle is like a base of a building. A larger base will be able
to support a larger building. Therefore, a larger rectangle will be able
to support a larger price move when prices move beyond the rectangle.
The larger the candles within the rectangle, the longer the pattern
stays in a rectangle. The move following the breakout of the taller
rectangle tends to be larger. The size of the above rectangle is 45
pips . Price hovered within the rectangle for 2 days and 6 hours before
breaking out of the rectangle.
At market lows, banks and large commercial companies will be
accumulating (buying) the asset and this can occur within the rectangle
pattern.
At market tops, banks and large commercial companies who had bought
the currency pair while it was cheap will slowly distribute (sell) to
uninformed speculators.
