Rectangle patterns are the most significant ones in technical analysis. These represent a trend reversal in many cases. The rectangle form can occur even in some trend phases, in this case represents an accumulation model: investors, who had previously purchased in case of upward trend or sold in case of downward trend, are reaping their profits.
HOW IS IT A REVERSAL TREND?
The market is hard and ruthless, all the securities that you see have to be purchased and the other way round, so, there's always someone who earns and always someone else who loses. A business cycle is formed by two phases:an upward bull phase and a downward bear phase. These two trends are separated from a Rectangle Pattern that establishes the limit.
But what is the meaning of this training? What happens in the market? The explanation is as simple as unexpected for people who aren't experts in trading. In this stage called distribution phase, big investors, called big fishes, make their profits obtained exploiting an ended bull phase, so, they sell their securities to investors who buy viewing the further increasing still excited by the bull phase. Small investors, or rather uninformed investors (almost all belong to this category) are the small fish and at this stage will lose a lot of money while sharks laugh behind them.
Once the distribution phase ends, it begins almost unexpectedly the bear phase, ie, the downward one. Securities purchased by small fish slowly lose value, the euphoria ends and begins in the tender heart of the small fish to prevail the hope that the price might turn back where it was before.
That doesn't happen, in fact, prices are pushed by sharks' sales, small fish must sell and collect losses or still hope until hope becomes anguish, until securities purchased with a lot of euphoria represent nothing more than a certain loss.
At that point, when media and newspapers still talk about crisis, starts a new distribution phase, and big fish, who can see beyond the horizon of small fish, buy again to earn a fortune in this new business cycle that begins with a wonderful bull phase.
SIZE AND DEPTH OF RECTANGLE
There's an important technical principle that a lot of traders ignore, observing more often, the cycle could be not only provided, but also exploited. The principle is:
"More time is required to complete the model and more higher are the price fluctuations inside it, more likely the movement that results is considerable".
Entrust yourselves to price patterns, especially if we talk about rectangle pattern, which use a lot of time to be formed, in fact first of all, our purpose is identifying the business cycle and knowing where we are in a certain moment. Moreover, in the distribution phases, we have to avoid the same fate of small fish: in the market in order to win we have to be big fish or learn to follow their trail.