My Favourite Indicator is Rectangle Pattern


By CEO Espen Grønstad


Even though companies and technologies have changed, we are still influenced by the pain of losing and the pleasure of winning. Consequently we largely make decisions based on emotions and not rational assessments. Studying the stock price allows us to identify patterns that represent greed, fear and uncertainty among the investors. One of these patterns is the Rectangle formation.


Rectangle formation (REC)

The rectangle formation is my favourite indicator. It is a short term formation, referred to in the theory as a continuation pattern. It signals the further direction of the stock and can be identified alone or in combination with a trend. The rectangle formation mirrors a degree of insecurity among investors, where buyers and sellers are pushing the stock price sideways. The supply and demand graph is constant, awaiting new information or news. When the stock breaks through former tops or bottoms, this indicates expectations for the direction to come and gives good trading opportunities. The height of the formation indicates the level of uncertainty in the period between optimists and pessimists, and therefore gives a potential target price. The formation is easy to understand and provides fundamental confidence.


Strategy – buying instead of shorting

The long term creation of value in the stock market is better for a buy and hold strategy than for short selling, which increases the risk for ordinary investors as well. This is an important reason to emphasise buy signals over sell signals. Our statistical analyses also show that buy signals from rectangle formations give good excess return over time. In the period 1996 to 2008 we identified 1,088 buy signals from rectangle formations on the Oslo Stock Exchange. 67 % of the stocks reached target price within a time period of the same length as the formation. We saw similar results on the Dutch stock exchange in the period 1996 to 2004. This strengthens the basic algorithms and opens for the possibility of using them on more markets. The report for the Oslo exchange also showed that buying at signal and keeping the stock for one length of the formation gave solid excess return compared to keeping the stock until target or buying index. In the period 1996 to 2004 the index gave an annual return of 5.9 %, sale at target (one height of the formation) gave an annual return of 7.1 % while sale at one formation length gave an annual return of a whole 27.4 %. This is a strong result which makes the rectangle formation my favourite. In addition, volume balance, direction of the trend and the market in general give good support by substantiating the probability of rising prices. It is important to assess your own risk, time horizon and personal investment goals as well, even though these are not taken into account in the research report.


Strategy:
- Buy at signal (upwards arrow)
- Assess liquidity and risk
- Positive volume balance strengthens the signal (VolBal)
- Set pre-defined target approx. 1L
- Use stop/loss consistent with your risk strategy


Examples

Skrevet af



Espen Grønstad
Partner & Senior Advisor - Investtech

While technology changes, the expectations and psychology of the investors are the same. That is why chart analysis is so important!

Articles:

Buy signals from rising trend

Opportunities following a falling Stock Exchange

67 % success for buy signals


Technical analysis:

Understand the psychology of the stock market

My favourite indicator is Trend

My favourite indicator is REC

"Investtech analyserer psykologien i markedet og giver dig konkrete tradingforslag hver dag."

Espen Grønstad
Partner & Senior Advisor - Investtech
 


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Investeringsanbefalinge(r)n(e) er udarbejdet af Investtech.com AS ("Investtech"). Investtech garanterer ikke for fuldstændigheden eller rigtigheden af analysen. Eventuel eksponering i forhold til de råd / signaler, som fremkommer i analyserne, står helt og holdent for investors regning og risiko. Investtech er hverken direkte eller indirekte ansvarlig for tab, der opstår som følge af brug af Investtechs analyser. Oplysninger om eventuelle interessekonflikter vil altid fremgå af investeringsanbefalingen. Yderligere information om Investtechs analyser findes på infosiden.

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