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 Can Be Traded Short

Rectangles provide no clear breakout direction, but 46% break out to the downside making it possible to trade on the short side. Just 42% of these breakouts are profitable and on average the profit per trade is negative -0.03% over a period of 10 days. The rectangle is not one of the best chart patterns when it breaks to the downside, but applying some filters can make this pattern more attractive to trade.

Refine Your Entries

A break to the downside requires certain market conditions to be effective. Avoid falling markets, so look for markets that are consolidating or rising. By using filters that require the stock to be in consolidation and the sector to be in a trend, either up or down, you can improve the results.

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

Following a series of fairly complex rules to determine which rectangle to trade can improve the results. However there is a danger that these filters are over optimizing to achieve the desired result. By applying these filters rectangles are profitable on 63% of the trades and return an average of 1.07% per trade in 13 days. There are more profitable patterns to trade.

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 Ways to Make Serious Money With A Small Investment