How To Generate Forex Signals Using Rectangles

Today, I want to teach you how to use rectangles to generate trading signals in forex.And I also going to apply this method to analyse what is currently going on in the market. I am also going to use the analysis to forecast the most likely direction of the market for this week.That means we are going to use this method to generate entry, and exit signals  today against next week trading.

Rectangles can occur in any time frame and any market you are following. As with many chart patterns the pattern is in the eye of the beholder. I have found that some traders are better than others at identifying chart patterns. It may take some time before you can spot the most common patterns.

The rectangle contains price movement between two points in a rectangular shape to which we add lines to signify the upper boundary and lower boundary. These lines should be horizontal. Slanted rectangle will most probably fall into the realm of ''Flags'', which we will discus in another lesson.

The top line should connect at least two bars and the bottom line should connect at least two bars. As most markets are in congestion most of the time rectangles are fairly common.

It is not necessary to draw the top and lower lines at the extreme of the congestion points but rather make sure the lines contain at least 95% of the congestion area. The longer the rectangle continues the more important the breakout.

To help identify a valid breakout there should be an increase in volume on the day (or time period) of the breakout. The breakout can occur in either direction but if you are in a defined up trend then an upside breakout is favored and vise versa for a down trend. If I am in a defined trend then I tend to view this pattern as a continuation patter unless it starts to break the other way.

There are a number of ways to trade the rectangle. You can buy or sell the breakout as it happens or you can wait to see if there is a pullback to the neckline (see charts). Once you have defined the rectangle you can also buy and sell at the boundaries of the rectangle. I prefer to buy at the lower boundary if in an up trend and sell at the upper boundary if in a down trend. This can be a very effective trade as the risk is small. If you sell at the upper boundary then your stop loss can be close to the boundary and vise versa for the long trade at the lower boundary.

If you sell the breakout place your protective stop inside the rectangle and do the same for buying the upside breakout. You can also measure the distance between the upper and lower boundaries and project the distance forward to get an indication of the size of the next move.

GBPSUSD Signal for  (Nov.1 to Nov. 5 2016)

Now we want to use this method to generate signal for next trading week.

We are going to use the GBPUSD chart above to buttress the teaching. The pair has been trapped within the prize zone of 1.2375 and 1.2088 for over ten days now.This is about 290 pips range. 287 Pips to be precise. Now we have a rectangular formation.What do we do with this?

This kind of formation usually leads to a strong breakout. It is a high momentum signal.In the next trading week, we expect that the pair would breakout of this long price range.Hence, our bias is as follow:

SHORT:

Entry price= 1.2078

Stop loss=1.2178

Take profit 1 = 1.1978

Take profit 2 = 1.1878

Risk = 1% of current equity

LONG:

Entry price = 1.2385

Stop loss = 1.2285

Take profit 1 = 1.2485

Take profit 2 = 1.2585

Risk = 1% of current equity

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