A bull trend forms after the demand exceeds supply, and then a bear trend occurs while sellers overpower the customers. When the bears and bulls manage to hold their ground without moving, it results in forming a trading range.
Sometimes, it forms a rectangle pattern, also described as a congestion zone. Bullish and bearish rectangles participate in a continuation pattern. However, they appear as a reversal pattern that warns the completion of a significant-top or bottom in many moments.
Before involving in it, it’s better to learn more about the bearish and bullish rectangle patterns.
Basics of The Rectangle Pattern
A rectangle is shaped after asset forms two comparable tops and two bottoms at the same level. The two parallel lines can join the high and the low points while forming resistance lines and the support for the rectangle.
The duration of the rectangle might range from weeks to several months. If this period seems shorter than three weeks, it is a flag. The longer an asset manages to spend in consolidation, the more significant is the final breakdown or breakout from it.
After demand exceeds supply, the asset tries to resume its move. However, traders book profits when the price gets closer to the previous reaction. By joining two high points with a straight line, it forms the resistance of this rectangle. When the price goes down, buyers keep the earlier reaction low, which forms the support.
It is difficult to predict the breakout direction while the price might trade between the resistance and the support for weeks or months. Because of that, it would be better to wait when the price escapes the rectangle before it turns bearish or bullish. After that, bulls try to change the direction, but the sentiment remains negative, and traders seek to sell on rallies.