Trading Opportunity

Rectangle formation under development in a rising trend and price near rectangle support

Theory: As described under "Rising trend and price near support", a stock in a rising trend is expected to continue rising within the trend channel. When the stock develops a rectangle formation, this is seen as a consolidation or pause before the rise continues. This is true even if the trend is broken while the rectangle formation develops, although this will increase the risk of a downward break. Often the price rises quickly once a rectangle formation is broken. Therefore, one will get a much better buying price if one buys before the break. The best buying price is at the floor of the rectangle formation. A suitable stop loss can be set right below the floor, such that the downward potential is low and the risk/reward high. Carefull investors can choose to get out of the stock at the ceiling of the rectangle formation, while those who want the highest possible return should wait till the price target is reached.

Score: The quality of the formation and the trend, meaning their similarity to a theoretically ideal formation and trend, is important for the calculation of the score. A price near the floor of the rectangle gives a higher score than a price near the ceiling. It is positive if the price is well positioned in relation to horizontal support and resistance levels, or if RSI is oversold. If the price has broken out of the rising trend channel, this is negative.

Buying price: Is set to the support of the formation and a little up (about 30% of the height of the formation).

Price target: The lower target is set to the ceiling of the rectangle formation and the upper target is set to the price target of the rectangle formation once broken up.

Stop loss: Is set to 20% of the height of the rectangle below the floor in the rectangle.

Time horizon: >From 40% (lower price target) to 120% (upper price target) of the formations length.