“Rectangle” trading strategy got its name because of the trade range in which the market often exists. Most of the time the price is traded within flat borders – the quiet movement towards the sideways trend.
The main borders of the sideways are the levels of resistance and support. “The resistance level” means a point after which the price starts to go down. The resistance level – it resists and doesn’t allow rising of the price.
“Support level” – is a point after which the price starts to go up. The support level – supports the price and doesn’t allow the price lowering. In order to solidify the theory, lets look at the 30-minute diagram of EUR USD currency pair.
Trading inside the rectangle
During the long-lasting descending tendency, the formation of the rectangle should be considered as a trend continuation figure. Therefore, it is recommended to trade when the price reaches the upper face of the rectangle – the resistance level. The trade during the long-lasting ascending trend goes on the similar way – it is recommended to buy, when the price reaches the lower face of the triangle – the support level.
The more the price repulses support/resistance level, the stronger this level becomes. If after the breakout the price returnes back over the level (false breakout) the rebound is expected
The resistance level and support level can also be considered as a reference point of the fixation of the profit and further “re-entering” to a trade.
For example, after sellig at the resistance point, you may buy when the price reaches the support point and vice-versa.