Intermarket Trading Strategies

Appendix C

Rectangles

To measure is to know. If you can not measure it, you can not improve it.

-Lord Kelvin

 

This has nothing to do with intermarket trading but I decided to include it here because since the publication of my article on rectangles in the June 2007 issue of Technical Analysis of STOCKS & COMMODITIES, I have received numerous emails from magazine readers asking for the MetaStock code of a rectangle pattern recognition system, obviously wanting to cash in on the article concepts.

I always wanted my articles to be of some practical use to trading professionals and active investors and the emails were all the motivation I needed to develop the MetaStock exploration which follows. But first, for the benefit of readers who have not read the article, I thought it would be useful to include the following information on rectangles.

Rectangles consist of a sideways price action or congestion area bounded by two horizontal or nearly horizontal parallel trendlines at top and bottom. At least two points are required to define each line but three points are more common. Rectangles can be either continuation or reversal patterns depending on the direction of the breakout in relation to the price trend before entering the formation. As reversals, rectangles appear more commonly at bottoms.

In the article, I presented some useful rectangle statistics and also a statistically derived formula to estimate the breakout price target objective. I used the statistics in the article to ...