Quick Summary: A flat price is one that is neither rising nor falling. In forex, a flat position means that you are neither going long or short in a currency, or your positions cancel each other out.
Full Overview: You’ve heard about winning and losing positions, but did you know that positions can also be flat? In fact, a trader can be flat even if he doesn’t have any active positions, and entire markets can remain flat for days or even weeks.
Here, we’ll discuss the different meanings of flat in trading, what they mean for traders, and how to take advantage of them.
What Does It Mean to be Flat?
In trading, flat usually refers to a price that hasn’t moved for some time or to a sideways moving market. For example, a currency pair that has opened and closed at nearly the same price is said to be flat for the day. The timeframe doesn’t really matter: If a currency pair trades inside a very narrow range for days or weeks, this condition can still be called a flat market.
Some traders also use the term to say that they’re neither long nor short in a currency, or that their position is neither in profit nor loss. If you don’t have a directional view in a currency, you’re flat that currency. If your position doesn’t rise or fall and trades near your entry price, that’s a flat position. A flat position is mostly considered as a positive result since the trader isn’t facing a loss.
What is a Flat Market?
There are two main market environments that every trader should know about and be able to identify: Trending markets and ranging markets. A trending market can be either in an uptrend or in a downtrend, while a ranging market is simply – ranging.
Flat markets are a synonym for ranging markets, identified by the absence of fresh higher highs and lower lows. A flat market is trading in between an upper horizontal resistance zone and a lower horizontal support zone, fluctuating from one zone to the other depending on whether buyers or sellers have the upper hand.
Flat markets are quite common in Forex. Currencies tend to fluctuate inside a narrow band until there are some important fundamental catalysts that catapult the exchange rate above or below the band. When a currency pair trades in a ranging market, market participants have likely found an equilibrium (fair) value that reflects all available fundamental data. Large investors who follow a trading strategy designed to short overvalued currencies and buy undervalued ones won’t participate in such a market, which may, in turn, reduce the liquidity of ranging markets until the currency pair starts trending again.
How to Trade a Flat Market?
A flat market can be traded in many different ways, but the most common one is to use a mean-reverting trading strategy. This means to buy when the price reaches the lower support zone of the range and to sell when the price reaches the upper resistance zone of the range. Currency pairs tend to revert to their mean or average value over time, and a mean-reverting strategy is designed to take advantage of that phenomenon.
When trading flat markets, it’s important to bear in mind that the longer a range persists, the higher the chance that the exchange rate will break out above or below the range. Therefore, to increase your success rate, try to trade flat markets only if there are no important market reports that could surprise other traders and investors, change the perceived fair value of a currency pair, and cause a break of the range.
In addition, traders usually have to wait until a flat market is fully confirmed. When a flat market is in its nascent phase, it takes time until you’re able to identify the absence of higher highs and lower lows, and as a range matures the chance of an upcoming breakout increases.
Still, many traders love to trade flat markets as the price retraces at well-defined support and resistance levels on its way up and down. When opening a buy position at the lower support, place your stop-loss just below the support zone and your take-profit at around 70-90% of the range width.
Never place your stop-loss and take-profit levels exactly at a support or resistance level. Traders around the world are following those levels which creates a cluster of orders around them. To stay ahead of your competition, place your stop-loss a few pips below a support zone and your take-profit below a resistance zone when going long. For short positions, place your stop a few pips above a resistance and your profit target a few pips above a support.
What is a Flat Position?
Unlike flat markets, flat positions refer to positions that are neither in profit or loss. Alternatively, a trader can be flat even if he doesn’t have an active position in a currency: If your analysis of the GBP/USD pair is neutral, i.e. you’re neither bullish or bearish that pair, you’re flat GBP/USD.
Returning to flat positions, if a position remains flat for a long period of time, you should look to exit the position and look for other trading opportunities. If your market and trade analysis was correct, a trade would become a winning trade a short period after you placed that trade. If your position is flat for days or weeks, i.e. fluctuates around the entry price, simply close it and move on.
What Causes a Flat Position in Trading?
Flat positions can be caused by a number of reasons. You might have taken a directional bet in a flat market, and the underlying fundamentals simply don’t support your market analysis.
When important news releases hit the market, markets tend to react with increased volatility. Imagine this scenario: The non-farm payrolls come in above market expectations, causing an immediate spike higher in the US dollar. However, after the initial euphoria, traders and investors realise that the details of the release are actually quite weak.
The headline of the US labor market report is the NFP, and the details are the average hourly earnings and the unemployment rate. If the details don’t support the headline number, the initial move may soon reverse and lead to a flat position, allowing astute traders to open a short position and “fade the release.”
In trading, the term “flat” can have various meanings. It can refer to a flat market, a flat position, or describe a trader who doesn’t have a directional view on a particular currency pair. A flat market is simply a ranging market that doesn’t trend, while a flat position refers to a position that is neither in profit nor in a loss. Most of the time, traders should get rid of flat positions as soon as they can.