Trading Rectangle Channels

Rectangle Channel

Source.TradeStation

FebD6

MnrD6

5.50

5.00

4.50

4.001

3.50

3.00

ApiW>

MayTDfi

Trading Rectangle Channel

The example above shows a "Rectangle" channel formation from the Level Three Communications (LVLT) daily chart. From February 2006 to April 2006, LVLT traded in a narrow range "Rectangle" channel from $3.25 to $3.75. In late March 2006, LVLT traded outside the "Rectangle" channel suggesting a potential upside in the stock. Most "Rectangle' channels are continuation patterns and trades are entered in the prior direction of the trend before the channel formation.

1. Enter a "long" trade above the high of the breakout bar.

2. Place a "stop" order below the low of the "rectangle" channel.

3. Targets are set at rectangle's height from the breakout level.

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