Bullish rectangle pattern: The most common advice individuals hear when starting out in the stock market is to follow the trend. More often than not, it’s easier said than done. Often times individuals are late to the party and miss out on the opportunity to earn profits from the trends.
But there are various ways an individual can identify a trend which includes different indicators and chart patterns. One of the most commonly used indicators is the bullish rectangle pattern. In this article, we will be discussing the meaning of bullish rectangle pattern and how they can be used to identify trends.
What Is Bullish Rectangle Pattern?
A bullish rectangle pattern is a continuation chart pattern that appears when the price stops moving upwards during a bullish trend. This pattern is formed when the stock starts moving sideways and creates a horizontal range of support and resistance.
This pattern gives a bullish signal to the individuals when the stock breaks the resistance levels and confirms the validity of the trend.
A bullish rectangle pattern is one of those chart patterns that indicate a temporary period of indecision among the buyers and the sellers. This is a very useful pattern that can be used for bullish trading techniques.
There is another similar pattern called the bearish rectangle pattern that appears after a downtrend and helps in identifying bearish continuation.
Components Of Bullish Rectangle Pattern
These are the constituents of a bullish rectangle pattern, keep reading to find out more.
1. Trend
A continuation pattern means the existing trend in the market is going to continue. Since the Bullish rectangle pattern is a continuation pattern there must be an uptrend before the formation of this pattern.
2. Support and Resistance
The main component of this pattern is forming a horizontal range of support and resistance. In order for this pattern to be considered viable, the stock price should form two support points in a similar range and two resistance lines in a similar range. These points need to be exactly on the same levels but should be in close proximity.
3. Volume
The bullish rectangle pattern does require a specific amount of volume. While the volumes may decrease as the pattern develops in one instance, they can also be volatile as the stock moves between the support and resistance. Higher volumes are preferred when the stock breaks out from this range.
4. Breakout
The bullish rectangle pattern can be considered a success when the price of the stock moves above the resistance. This is when you can enter a long position in the stock
5. Target price and the stop loss
Once the price moves above the resistance levels, the target price you can keep for the stock is the range size from the support and resistance levels.
How To Trade Using The Bullish Rectangle Pattern?
Trading using a bullish rectangle pattern is a pretty straightforward process and does not require you to combine other technical indicators. Below is the step-by-step approach that help you successfully bullish rectangle pattern.
- Identify a Trending Market
Before identifying a range of support and resistance, it is important to ensure that there is a prior trend in the particular stock. This is because the bullish rectangle pattern is a continuation pattern and its intention is to signal the continuation of the previous trend.
- Identify Price Consolidation and Draw Support and Resistance Levels
The next important step to trade using this pattern is to use draw support and resistance lines. As stated earlier, the price of the particular stock needs to have two support and two resistance lines at a close price point in order for it to be identified as a rectangular range
- Wait for the Breakout confirmation
A breakout here is when the price of the stock crosses the resistance line. Before entering a long position in the stock, you should make sure that the price of the stock has closed above the resistance. This will help you get a better confirmation of the breakout.
- Set a target and a stop loss.
Once you have entered a long position in the stock, you can set a target for profit to extent of the size of the support and resistance line. The stop loss should be set below the range of resistance levels of the pattern.
Examples Of Bullish Rectangle Pattern
Listed below are a few instances that serve as examples of the bullish rectangle pattern.
Example 1
As you can see in the above price chart of Adani enterprises stock, the share price had an uptrend which was followed by a pullback. After the pullback, the stock started moving in a horizontal range of support and resistance which was followed by another breakout for an uptrend.
Example 2
Here is another example with the price chart of Godrej Properties. Here you can see that the price has moved in a range after an uptrend, after which it broke out of the range to increase further. But you can see that, once the share attained the profit target, it fell back below the resistance level. At this point, you can enter a long position again when the price moves above the resistance level
Pros Of Bullish Rectangle Pattern
- Identifying and trading using a bullish rectangle pattern is simple. As the price of the security continuously bounces off the same support and resistance levels, identifying this pattern is fairly easy.
The individuals can use these same support and resistance levels of the pattern to enter a long or short position in the market.
- Does not require the need to use other indicators along with this pattern. As this pattern itself is a result of prices bouncing off the same support and resistance levels, individuals can simply use the same levels to enter and exit trades in the market.
Though this pattern does not require the use of any indicators, using them will give you a better conviction for your trades
- It is simple to plot the Entry point, stop loss, and Profit targets. In this pattern, the level of support can be used by individuals to enter a long position and can also be used as a stop loss for long positions
The resistance levels in this pattern can be used by traders to enter a short position and also be considered as a stop loss for the short position
Cons Of Bullish Rectangle Pattern
- There are chances of the pattern giving us false breakouts. This means the price of the security may break through the support or resistance level indicating a new trend but can reverse back and start trading within the pattern again.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
In this article, we discussed what a bullish rectangle pattern is, its components, how to trade the pattern, and the pros & cons of the pattern.
The bullish rectangle pattern is a useful and simple pattern that individuals can use to identify potential upward breakouts. But individuals should always use caution and set up proper risk management strategies because these patterns may not work in their favor every time.
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