"Box formation"?

Hi, I am studying for an exam that is FX related.

Is anyone able to answer this question, and explain the answer?

"Using technical analysis, what is the best approach to trading a box formation?"

1) Buy when the trade price reaches the bottom of the box and sell when the price reaches the top

2) Wait for the price to break out of the box formation and trade as appropriate

3) Both of the above

4) Trade a ratio spread.

I would say that the correct answer is #3.....but I don't know what is meant by #4.

"Using technical analysis, what is the best approach to trading a box formation?"

1) Buy when the trade price reaches the bottom of the box and sell when the price reaches the top

This would give you a good risk to reward ratio, with stops just below the defined level of the box. Optimally a larger compression box with some room between the top and bottom to have a larger target. Ideally you could take half your position at 50% of the box and lock in the rest.

2) Wait for the price to break out of the box formation and trade as appropriate

This would be the option for after being stopped out of the above trade. The break of the box will generally produce a run, however the risk to reward is usually worse. Generally behind the other side of the box. This may be the only option on smaller boxes.

3) Both of the above

This is the best option if the box is well defined. Trade bounces off the box until it breaks, then trade the break.

4) Trade a ratio spread.

Usually an Options term refering to differing size puts or calls. There is a way of trading box breaks that uses a hedge, basically buy at the bottom and sell at the top, then kill the bad one on the breakout. This gives you an entry at the bottom of the box for a break out of the top.

Good luck on your exam