The pattern is not completed until the price breaks above the resistance or below the support. The direction of the breakout can happen in either direction and it is not normally determined beforehand.
Trend – With this type of pattern you need to have a trend in place that should be a couple of months old but the direction of the trend is not important. The longer the trend the less likely it marks a continuation.
Four Points – During the pattern you will need at least 2 reaction highs and 2 reaction lows. They do not have to be exactly equal but you would like to see them within a reasonable proximity. Although not necessary you will want the highs and lows to alternate but as you can see above this does not always have to be the case.
Volume – The volume does not follow any pattern during the development but when you get to the break of the support you will find and increase in volume.
Duration – The duration of the rectangle can last anywhere from a few weeks to many months. Any short period the pattern would usually be considered a flag. When looking at the duration the longer the rectangle the more it can surpass it breakout target.
Breakout Direction – The direction of the price can only be determined after there is a break out. Due to this using stop limit orders above and below the support and resistance can be a great way to trade the pattern.
Return to Breakout – As with many support lines, after they have been broken they can then turn to resistance lines where the price retraces back up to this point.
Target – To find the price target you will want to measure the height of the rectangle and then apply it to the breakout price.
The above example is showing a classic setup on gold back in April where you have a triple top followed by a slight decline putting the price into a rectangle pattern. The price then rebounds within the rectangle until you have a break of the support level. After this is broken there is a strong move to the downside. You will often find that when the pattern breaks there is a strong move due to thestrong downward bias as the sellers overcome the buyers. You often will have a retracement to the support line after the break and can be used as an entry point but the price will not always retrace so you can lose out on many patterns by not getting in early enough.
The rectangle is a continuation pattern which forms a trading range during the pause in the trend. The pattern consists of at least 2 comparable high and 2 lows to create the support and resistance lines. Both lines should be parallel to each other showing no bias in either direction.