Rectangle patterns form when price trades sideways between two parallel horizontal lines — a clearly defined support and resistance. Rectangles represent a period of equilibrium where buyers and sellers are evenly matched. The pattern resolves when price breaks decisively through one of the boundaries, often continuing in the direction of the prior trend.
Horizontal support and resistance forming parallel boundaries. At least two touches of each boundary for validation. Volume tends to decrease during formation. Continuation bias: breakout typically favours the prior trend direction. Can also function as reversal patterns in specific contexts.
Enter on a breakout above resistance (bullish) or below support (bearish) with expanding volume. Wait for a retest of the broken boundary as new support or resistance for a lower-risk entry. Trade bounces within the rectangle from support to resistance and vice versa during formation. Confirm breakout with momentum indicators crossing their signal lines.
Measured-move target equals the height of the rectangle projected from the breakout point. Place stops on the opposite side of the rectangle boundary. Trail stops using the broken support or resistance level. Exit range-bound trades near the opposite boundary with tight targets.
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Rectangles that form after strong trends have a higher probability of resolving as continuation patterns. Trading within the rectangle can be profitable but requires tight risk management — use the boundary as invalidation. The longer the rectangle forms, the more powerful the eventual breakout tends to be.
Pennants are short-term continuation patterns that form after a strong directional move. They resemble small symmetrical triangles, with converging trendlines creating a compact consolidation zone. Unlike flags, which have parallel channels, pennants converge to a point. The breakout typically occurs in the same direction as the preceding move, with the measured target based on the flagpole.
The rounding bottom (also known as a saucer pattern) is a long-term bullish reversal formation characterised by a gradual, U-shaped transition from a downtrend to an uptrend. The pattern reflects a slow shift in sentiment from bearish to neutral to bullish, typically forming over weeks or months. A breakout above the pattern's resistance (the left rim level) confirms the reversal.
The head and shoulders is one of the most reliable reversal patterns in technical analysis. It consists of three peaks — a higher central peak (the head) flanked by two lower peaks (the shoulders) — connected by a neckline drawn across the reaction lows. A break below the neckline confirms the reversal, with the measured target equal to the distance from the head to the neckline projected downward from the breakout point.
Rising and falling wedges are converging trendline patterns where both support and resistance slope in the same direction. A rising wedge (both lines slope upward, converging) is typically bearish, while a falling wedge (both lines slope downward, converging) is typically bullish. Wedges differ from triangles because both trendlines slope in the same direction rather than converging symmetrically.