Tips for Trading Rectangles Short

By Jeff Cartridge

The rectangle can be traded on the short side entering the trade as the stock breaks out of the pattern to the downside. The pattern forms when the two boundary lines that contain the price movement are parallel. The bottom line and the top line are both near to horizontal. Sometimes these may be called a channel or a consolidation, but the most famous version of this pattern was a variation by Nicolas Darvas, published in his book "How I Made $2 million in the Stock Market".

Rectangles Can Be Traded 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.

Specific Setups to Improve Profitability

Short breakouts from rectangles work better in very specific market conditions. The market should be in an up trend or consolidating. The sector should not be in a consolidation, but the stock should be consolidating for the best results when trading rectangles short.

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. - 23210

About the Author:

Jeff Cartridge has been trading CFDs since 2002 and created the website LearnCFDs.com Trading Chart Patterns - All The Insider Tricks