What it is:
How it works (Example):
A break below support or above resistance creates a high-probability entry point for a trader. The alternation principle states that old support, once broken, becomes new resistance. The reverse is also true -- when old resistance is broken, it should then become new support.
Targets can also be established using rectangles. According to the measuring principle, a stock or index should move the same approximate height after breaking out of the rectangle as it did within it. A rectangle in the S&P 500 is shown below:
Why it Matters:
In general, most traders prefer to trade rectangles only when the pattern has been resolved one way or another. While the formation doesn't typically yield enormous profits, it does usually provide traders with a high-percentage probability of generating a small profit on a breakout or breakdown. Considering rectangles often show a very clear stop and an explicit price target, it would be "square" to ignore them.