Breakdown of a Flat on Forex 2 Reasons Why a Flat Occurs
Before you talk about the possibility of trading in flat, you need to determine what is this same flat. And we will not use the flat itself, but a breakdown of the flat. So, a flat or a side trend is a market situation when the price moves with a little volatility, i.e. in a narrow range. More technically speaking, price is consolidating in a narrow range. Why it happens? There are 2 reasons why a flat occurs:
1. the market is waiting, i.e. The market situation is not clearly defined.
For example, this is typical for the market before the release of important economic news (speech by the head of the Fed, say). Players (traders) do not know what the head of the Fed will say, whether there will be information about a change in the interest rate, etc. After all, no one will open a deal "at random." Suddenly, the news will be bad for the selected asset and the price will turn in the opposite direction, leaving the player with the triggered stop loss and loss. Therefore, everyone is waiting for certainty. As soon as the situation clears up, the price starts moving up or down lightning fast. After the important news, sharp jumps in quotes are possible up to several hundred points in a couple of minutes.
2. The second reason may be a temporary balance between bulls (buyers) and bears (sellers). In this situation, the volumes will also be large, because both bulls and bears keep a large number of transactions open or more or less evenly increase their positions.
Separately, it is worth mentioning the flat in the moments of the absence of a large number of players on a particular asset (currency pair). This occurs, for example, between trading sessions or when an asset is poorly traded during a trading session (for example, a pair of EUR / USD during an Asian session). The price simply does not have an impulse to strong movement and it is consolidating in a small range.
So, we decided on the reasons for flat. It is also clear that sooner or later the flat ends. It looks like a price breaks the conditional upper or lower flat border (see Figs. 1 and 2). It is at such moments that it is good to open a position in the direction of this movement.
A flat breakdown occurs when bulls or bears begin to dominate in strength. And if the strength of one of the groups is large enough, a new trend arises. And what can be more profitable for a trader than entering a position at the beginning of a new trend?
Of course, you can trade inside the flat. Many scalpers do this. The essence of trade comes down to selling from the upper border of the channel and buying from the bottom. In this case, it is very advisable to set 1-2 indicators on the chart (for example, Bollinger bands, Volumes or moving averages) so as not to miss a flat breakdown.
As you probably know, a scalper (pipser) opens many transactions, making a profit of 1 point or more from one transaction. Therefore, flat is ideal for scalping. But what do other traders who are accustomed to classically trade with the trend do? That's right, use a flat break.
An important point is that the closer the borders of the flat are to each other (i.e., the more insidious the flat is), the stronger the price will tear after its breakdown.
Briefly dwell on trading on breaking flat. We recommend using Bollinger Bands as the only indicator to help identify and confirm flat.
The convergence of the side lines of the Bollinger Bands precisely indicates a flat, and their expansion indicates a breakdown of the flat. The center line always shows the direction of the trend.
Some traders also use fractals. In this case, you need to choose the extreme, i.e. those on which the canal is built. After that, we place 2 pending orders for the breakdown: BuyStop just above the upper line of the Bollinger Bands, SellStop - a little lower. After the news release, one order is triggered, the other is deleted manually.
Considering that 80% of the time the price is in flat, the chances of making money on a flat breakdown are very high.