When this classic pattern appeared, professional traders knew that it was time for range trading

A bull market trend occurs when demand exceeds supply, and a bear market trend occurs when sellers overwhelm buyers. When the bulls and bears hold their ground, a trading range is formed.

Sometimes this results in a rectangular pattern, which can also be described as an integrated zone or a congested zone. The bearish and bullish rectangles are generally considered a continuation pattern, but in many cases they act as a reversal pattern, marking the completion of a major top or bottom.

Before we dive into more about the bullish and bearish rectangular patterns, let us first discuss how to identify them.

Basic knowledge of rectangular patterns

When an asset forms at least two comparable tops and two bottoms that are almost at the same level, a rectangle is formed. Two parallel lines can be used to connect high and low points to form rectangular resistance and support lines.

The duration of the rectangle may vary from a few weeks to a few months. If this time is shorter than three weeks, it is considered a sign. Generally, the longer an asset spends in integration, the greater the possibility of eventual breakthrough or collapse.

Bullish rectangle pattern

Bullish rectangle pattern. source: Transaction view

As shown above, the asset is in an uptrend, but after the rebound, some bulls took profits, which created the first reaction high. After the price correction, several bargain hunting and preventing the decline, the formation of the first trough.

When demand exceeds supply, the asset tries to resume its upward trend, but when the price approaches the previous reaction high, the trader will profit again. Connect these two high points with a straight line to form a rectangular resistance. When prices fell, buyers defended the earlier reaction lows, which formed support.

It is difficult to predict the direction of the breakout in advance, and the price may trade between the support and resistance levels for weeks or even months. Therefore, it is best to wait for the price to break out of the rectangle before turning bullish or bearish.

In the example above, as demand exceeds supply, the price breaks the resistance of the range. This may lead to a resumption of the upward trend.

Bearish rectangle pattern

Bearish rectangular pattern. source: Transaction view

As shown in the above example, the asset is in a downward trend, but when the price reaches a level that traders think is undervalued, bargain-hunting buyers absorb the supply and form a reaction low. The bulls then tried to reverse the direction, but the sentiment remained negative, and traders sold rallies, forming a high reaction.

When the price reached the first reaction low, traders bought on dips again, but the shorts stopped recovering near the earlier reaction high. After that, the price is stuck between the parallel lines, forming a rectangle.

When the price breaks and closes below the range support, the bearish rectangular pattern is completed. This usually leads to a resumption of the downtrend.

Bullish continuation rectangle pattern

THETA/USDT daily chart. source: Transaction view

THETA has been in an uptrend, and then hit a resistance near $0.80 on September 30, 2020. On the downside, buyers stepped in and prevented the correction near $0.55. Since then, the price has stayed between these two levels until December 15, 2020.

The THETA / USDT currency pair broke the rectangle on December 16, 2020, which shows that the bulls overwhelm the bears. This marks the resumption of the upward trend.

THETA/USDT daily chart. source: Transaction view

To reach the goal of the breakthrough from the rectangle mode, calculate the height of the rectangle. In the above case, the height is 0.25 USD. Add this value to the breakout level, which is $0.80 in the example above. This gives a target target of $1.05.

After a long period of consolidation, when the uptrend resumes, it may significantly exceed the target as in the above situation. Traders can use the target as a reference point, but they should make a decision to close a position or hold a transaction after considering the trend strength and signals from other indicators.

The same process applies to the bearish rectangle, as shown below.

LTC/USDT daily chart. source: Transaction view

Litecoin (LTC) Has been in a strong downward trend, from US$184.98 on May 6, 2018 to US$73.22 on June 24, 2018. Buyers stepped in at this level and tried to form a bottom, but the bears did not relax. They will rebound and stagnate at $90 on July 3, 2018. Since then, the LTC/USDT currency pair has maintained range fluctuations between these two levels until August 6, 2018.

The bears reaffirmed their dominance on August 7, 2018 and pulled the price below the rectangle. This restored the downtrend.

LTC/USDT daily chart. source: Transaction view

The target after breakdown from the bearish rectangle is calculated by subtracting the height of the rectangle from the breakdown point. In the above example, the height of the rectangle is $17. Subtracting $73 from the breakdown level results in a target of $56.

Rectangle as inversion mode

ETH/USDT daily chart. source: Transaction view

Ether (Ethereum) Reached the highest point of US$1,440 in January 2018 and started a strong downward trend, reaching US$81.79 in December 2018. This level attracted strong buying from the bulls, and the ETH/USDT currency pair rebounded sharply. However, the bears will rebound and stagnate near $300 in June 2019. Since then, the currency pair has stayed between these two levels until July 24, 2020.

The bulls pushed the price above the rectangle on July 25, 2020, which indicates the start of a new uptrend. The bears tried to pull the price back below the breakout level of $300, but failed. This shows that market sentiment has turned positive and traders are buying on dips. The currency pair resumed its upward trend in November 2020.

Although the pattern target for a break from the rectangle is only US$518.21, the currency pair rose to an all-time high of US$4,372.72 in May.

Key points

The rectangle mode is a useful tool because it can be used as either a continuation mode or a reversal mode. If the rectangle is large, traders may buy near support and sell near resistance.

In order to benefit from the rectangle and avoid being saw-saw, traders can wait for the price to break and maintain above or below the pattern before opening a position.

The target target should only be used as a guide, because when the price breaks through the long rectangle, it tends to substantially exceed the target target.

The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading action involves risk, and you should conduct your own research when making a decision.