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, Unpredictable But Profitable

Rectangles show no clear tendency to break up or down. Despite the fact 54% of the patterns break out to the upside this is likely due to the fact the market tends to move higher. Around half (56%) of these breakouts are profitable and on average the profit per trade is 1.15% over a period of 12 days.

Refine Your Entries

As would be expected rectangles work well when the market, sector and stock are bullish. For best results the market, sector and the stock should be consolidating or in an up trend.

The location of a breakout from a rectangle is unimportant. If it breaks out early in the pattern it will produce similiar results as if it breaks out later. Patterns that have a length of between 10 days ? 35 days produce better returns.

Volume is important with rectangles ensure that the volume is supportive of the breakout with the volume as the share rises more than volume as the share falls. Avoid patterns that have lower highs prior to the breakout or the last turning point is formed by a single outside candle.

Rectangles Deliver Strong Profits

By following these simple rules profitability of trading rectangles can be improved substantially. With an average return per trade of 1.89% in 13 days and an extremely high hit rate of 71% it is understandable why many traders are drawn to the rectangle.

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