Have you ever seen a squared-out Hello Kitty? We see something very similar to that on trading charts A LOT. It’s called a rectangle formation, and it’s the King of Consolidation. There are different ways of trading a rectangle. Today we are focusing on trading a rectangle breakout.
This week’s Q&A Friday question is from our Invest Diva student, Helen, and she writes:
I liked the Hello Kitty rectangle metaphor in your coffee break video
You mentioned that after the formation of a rectangle pattern on the USD/JPY 4 hour chart, the pair broke the resistance level and moved up. But it was not yet a good time to place a buy order before the pair continued dancing up, forming another 6 candles.
I want to know why we had to wait for the 6 candlesticks before entering a bullish position? How can I identify the exact timing?
Helen thank you for your question on King of consolidation! On the forex dance floor, the pair sometimes gets trapped in a rectangle shape which resembles a squared-out hello kitty. As we have mentioned in our education video, a rectangle is a neutral formation in terms of the direction in which it will break out. The pair will test the support and resistance levels over and over again until it is able to break one of the levels. That is why, as always, we should wait for a confirmation before opening a position after a rectangle breakout.
I hear from your question that you have trouble identifying that “confirmation.”
The reason why we waited for the whole 6 candlestick on the USD/JPY 4hour chart before entering a bullish position is that even though the pair was testing above the resistance level, it had yet to confirm the breakout, because it had not yet closed above the resistance level, and had not yet opened above it.
Another way to confirm the breakout of a consolidation is to zoom in and out on different timeframes to and get a feeling about the market sentiment. If the price action is getting speedier on shorter time-frames, that can also help you with the confirmation of the breakout.
Thank you for being an Invest Diva student and submitting your question and if YOU have a burning forex question you need to be answered, get your bones over to Invest Diva’s community and ask away.
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