In trading extended rectangle bottoms, which is a key step in the strategy?

In the context of trading extended rectangle bottoms, the key step involves buying on a test of a major support level and setting a stop-loss for a new low price. This strategy is based on the premise that extended rectangle bottoms often indicate a prolonged period of consolidation after a downtrend, where the price oscillates between support and resistance levels.

When the price approaches the major support level, it signifies a potential area where buyers may emerge again after the selling pressure has subsided. By entering a buy setup in this scenario, traders are looking to capitalize on the likelihood of a reversal as the price tests this support. Setting a stop-loss just below the new low provides a safety measure, limiting potential losses if the price breaks below the support level, which would invalidate the bullish scenario.

This approach is essential for managing risk effectively while taking advantage of the anticipated upward momentum from the tested support level. In contrast to the other options, this method aligns with sound risk management and trading principles within the framework of technical analysis, particularly in identifying and acting on significant price levels.