If you've read my last article, then you should have a basic understanding of trading on Rectangle patterns. However, opinions on trading this pattern were divided. Let's find out what world-class traders think about this pattern.
Alexander Elder
This expert in the field of stock markets believes that you shouldn’t wait until the Rectangle pattern completes its formation. You should open trades during market fluctuations within the range.
Basically, the sides of the Rectangle pattern become resistance and support levels. The moment the market reverses at one of edge of the range, it provides an great trading setup for a short-term position:
- When the market bounces off the upper side (resistance), enter a sell trade.
- When the market bounces off the downside (support), start buying.
According to Elder, oscillators should be used to confirm the bounce.
John Murphy
John Murphy's views are the same as Elder's. In his opinion, traders should not miss an opportunity to make money on price movement within the Rectangle. According to Murphy, it’s your way to use all the possibilities that the pattern offers:
- When trading within a range, you risk even less because you have well-defined boundaries and you know when the price will reverse. So you can earn on each swing until one of the sides of the Rectangle is broken.
- When the pattern is finished forming, traders have an additional opportunity to earn money on trend trading.
Jack Schwager
This exchange analyst thinks that trading within a range is too risky. In his opinion, you should wait until one of the sides of the Rectangle pattern is broken and trade on the further trend.
Here are some helpful tips from Jack Schwager:
- Take into consideration the volatility inside the Rectangle. Lower volatility provides a more reliable breakout signal.
- The longer the range stretches, the sooner it will end. Use the time factor to determine the end of the pattern formation.
- The price can make false breakouts of the range. Wait for confirmation of further movement before entering a trade. For reliability, you can also use limit orders.
Bottom Line
It is extremely difficult to draw a clear conclusion when world-class professionals have opposite opinions. This is where the rule that every trader is unique comes into play. What works for one person may not work for another.
To decide which strategy to choose for trading the Rectangle pattern, decide which type of trading suits you best:
- Long-term traders should wait for the completion of the Rectangle and open a position along with the trend. You can also wait until the price returns to retest the edge of the channel and open an additional trade in the same direction.
- Short-term traders can take advantage of every opportunity the market offers. This includes price movement within the range. You can use reversal candlestick patterns to confirm bounces off the edges of the sideways channel. You can also use Take Profit to save your income. Exit points should be set shortly before the edges of the range. This method is riskier. But those who don’t take risks, don’t earn, right?
Now you know about all the possibilities that the Rectangle pattern provides. Choose your strategy and go make some money!