The rectangle is sometimes referred to as a channel or a consolidation. It is a very well known and easily recognized chart pattern that has been used by many successful traders over the years, including Nicolas Darvas who made over $2 million in the stock market using a variation of the rectangle he called a Darvas box. A rectangle is formed when the price action is contained within two lines. Both the top line and bottom line are close to horizontal and the two lines are parallel.

Rectangles Can Be Profitable Short

Rectangles are definitely not one of the most predictable patterns that are available to trade short. With just 46% of the patterns breaking down rectangles also don’t deliver good returns when they do. The average gain is negative, -0.03% in 10 days with less than half of the breakouts (42%) being profitable. These results aren’t great, but selecting the right conditions can make trading rectangles better.

Improve Your Trades

When you look at the performance of a rectangle there is an unusual combination of market, sector and stock trends. The market should be consolidating or in an up trend. The sector is best if it is not consolidating, while the stock should be consolidating to make the best profits.

Another key to picking successful short breakouts from rectangles is to ignore patterns formed by an outside day candle prior to the breakout. Also avoid patterns that have higher highs or equal closes prior to the breakout.

If volume supports a rectangle breakout then the profitability of the trades improves. For volume to support the breakout, volume when the stock is going down should be greater than volume when the stock is going up.

Short Trading Rectangles Can Be Profitable

You can improve your trading results by using a series of very specific filters that have been outlined here. It is highly likely that these results have been achieved by tightening the filters too much and this is unlikely to be a robust trading strategy. This select group of rectangles delivers an average profit of 1.07% in 13 days and is profitable on 63% of the trades. Overall there are more attractive patterns to trade on the short side.

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.

Jeff Cartridge has been trading chart patterns since 1998 and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains