A flat is a corrective pattern. The concept comes from the Elliott Waves theory and it is quite impressive that, like in the case of zigzags, the key stays here as well in the 61.8% retracement level. Trading in general with Elliott Waves theory is all about the Fibonacci levels, both on the expanding and retracement levels as it is the only way to put order in other wise a very complicated field like technical analysis is.
When taking a trading decision one should look at both technical and fundamental analysis but let’s just say that the technical picture is always offering a competitive advantage in front of the fundamental one.
It is nothing more important when trading binary options than to try to find the perfect balance between your analysis and the expiration date of your option. On a perfectly balanced trade, a trader should take into account both technical and fundamental analysis, put in the case of binary trading, the expiration date is often the most tricky part.
Flats are offering the possibility for the trader to find the perfect striking price for the option and then, based on the retracement level for the b wave and the time frame the analysis is being made on, set the expiration date in such a way that the option is expiring in the money. Like mentioned a bit earlier, 61.8% retracement is mandatory in such patterns and depending on the length of the reversal, or retracement, there are multiple types of flats.
Forecasting Future Price Levels with Flats
This is important as depending on the type of the flat that the market is forming one can anticipate the next leg or move market is about to make, or to forecast future price action. After all, this is what trading represents: forecasting future price levels on the right side of the screen based on the information we already know, taken from the left side of the screen.
According to Elliott, a flat pattern is a corrective one and it is always labeled with letters. It has three legs, therefore it is labeled as a-b-c. Out of those three waves, waves a and b are corrective as well, while the c wave is an impulsive move and should respect all the rules an impulsive move has.
That being said, waves a and b can be, of a lower degree, a simple or a complex correction, namely a flat or a zigzag of a lower degree or some kind of combination of the two. As for the c wave, according to the theory, we should have an idea about its length based on the type of waves a and b.
For example, if wave b fails to retrace more than 80% when compared with wave a, then chances are that wave c will most likely take the lows in wave a and this is being given by the inability of wave a to retrace more. We are talking about lows in the case of a bullish flat, and in this case both BUY and SELL orders can be traded, naturally equivalents of binary options too.
Fat pattern forex
The SELL contract/PUT option in the example from above should have a shorter trade time than the BUY order/CALL option to follow as the c wave, being an impulsive move, should travel faster than the move to follow and, plus, the flat being a bullish pattern, should be followed by bullish price action. In short – bearish move causing the fall will come first, but will stop and turn to a bullish one.
There is one aspect in analyzing forex markets that seem to be not really understood by traders, and this refers to complex corrections. For example, when one is looking at a correction, is not always simple. In a flat, wave a is always a corrective one and this means it can be a flat as well, only a flat of a lower degree of course.
This is why Elliott Waves Theory is so simple and complicated in the same time as sub-divisions and cycles are difficult to be noticed. However, once that is done, then forecasting price on the right side of the chart is as easy as it can be.
The two video analysis that are coming with this educational article are meant to show you how to identify a flat and, more important, how to trade such a pattern based on both the Fibonacci retracement as well as on the fact that two corrective waves are being followed by an impulsive move. Besides flats and zigzags, there is only one other simple correction and that is a triangle.