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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Rectangle Tops

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Busted
Patterns
Candles Chart
Patterns
Event
Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 04/21/2017
20,548 -30.95 -0.2%
9,134 7.68 0.1%
706 4.81 0.7%
5,911 -6.26 -0.1%
2,349 -7.15 -0.3%
YTD
4.0%
1.0%
7.0%
9.8%
4.9%
Tom's Targets    Overview: 04/17/2017
20,100 or 21,150 by 05/01/2017
8,500 or 9,500 by 05/01/2017
725 or 685 by 05/01/2017
5,950 or 5,650 by 05/01/2017
2,275 or 2,425 by 05/01/2017
Mutt Winners: None YTD

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., pictured on the right, pages 579 to 594.

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Rectangle tops (or horizontal channels), so called because price enters the pattern from the bottom (creating a top), are mid list performing chart patterns. The break even failure rate is higher than other chart patterns, but the average rise in a bull market is quite good. Downward breakouts have a good performance rank because the change after the trend is a very high 57%.

 

Score your pattern
for performance

Rectangle top chart pattern

Rectangle Top Chart Pattern

Rectangle Tops Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 12 out of 23; 6 out of 21
Break even failure rate for up/down breakouts: 9%; 11%
Average rise/decline: 39%; 17%
Throwback/pullback rate: 64%; 58%
Percentage meeting price target for up/down breakouts: 80%; 63%

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Rectangle Top Identification Guidelines

CharacteristicDiscussion
Price trendUpward leading to the chart pattern.
ShapePrices have flat tops and flat bottoms, crossing the pattern from side to side following two parallel trendlines.
TrendlinesTwo near horizontal trendlines bound price action.
TouchesPrice should touch each trendline at least twice using distinct peaks and valleys.
Volume trendTrends downward at least 70% of the time.
BreakoutUpward 68% of the time.
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Rectangle Top Trading Tips

Trading TacticExplanation
Measure ruleCompute the height between the two trendlines (A and B in the measure rule figure to the right) and then multiply it by the above “percentage meeting price target.” Add it to the price of the top trendline (B, upward breakouts) or subtract it from the bottom trendline (A, downward breakouts) to get a target price (C).
Wait for breakoutSince the breakout can be in any direction, wait for price to close outside the trendline before taking a position.
Intrapattern tradeIf the rectangle is tall enough, buy at the bottom trendline and sell at the top one, then reverse the trade.
HeightTall patterns perform better than short ones.
Volume shapeRectangles with a random volume shape and upward breakout perform best.
Yearly lowRectangles with upward breakouts within a third of the yearly low perform best but samples are few. Downward breakouts do best near the yearly low.
Partial rise/declineA partial rise predicts a downward breakout 61% of the time; a partial decline correctly predicts an upward breakout 89% of the time.
Throwbacks and pullbacksThrowbacks and pullbacks hurt post breakout performance.
Rectangle top measure rule
The Measure Rule
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Rectangle Top Example

Rectangle top chart pattern example

The above figure shows an example of a long rectangle top chart pattern. Price bounces between two parallel trendlines for what seems like forever, but it creates a strong move upward when price finally pierces the top trendline.

-- Thomas Bulkowski

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Other Rectangle Top Examples

See Also

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. If debugging is the process of removing bugs, then programming is the process of putting them in.