Rectangles - Long Trading Strategy with CFDs

By Jeff Cartridge

The rectangle can be traded very successfully on the long side entering the trade as the stock breaks out to the upside. 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, Unpredictable But Profitable

Rectangle breakouts show a slight bias to the upside with patterns breaking up 54% of the time. This upward bias is likely due to the overall bullish bias of the market as the symmetrical nature of the pattern does not clearly indicate a breakout direction. The breakout of rectangles can deliver strong returns with 56% of the patterns being profitable. The average return for the long trades is 1.15% in 12 days.

Specific Setups to Improve Profitability

As would be expected rectangles work well when the market, sector and stock are bullish. For best results the market, sector and the stock should be consolidating or in an up trend.

Rectangles are sensitive to the length of the pattern with breakouts that occur between 10 and 35 days, from the start of the pattern, performing the best. While the pattern breakout works best in the range specified, it is not important if the pattern breakout is early or late in the pattern.

If the volume is in support of the breakout the results are better. Supportive volume means the volume on the way up is higher than the volume on the way down. The best results are achieved if the high is higher or equal before the breakout and do not trade patterns that are formed around an outside day candle.

Rectangles Can Be Very Profitable

By following these simple rules profitability of trading rectangles can be improved substantially. With an average return per trade of 1.89% in 13 days and an extremely high hit rate of 71% it is understandable why many traders are drawn to the rectangle.

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. - 23223

About the Author:

Jeff Cartridge is the author of Supercharge Your Trading with CFDs and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains