There are many types of pattern which are identifiable on a technical analysis chart, however one of the most commonly observed is the normal flat. An investor who wishes to maximise their chances of success in executing trades would be well advised to learn how to identify and trade this pattern. The normal flat is a pattern which requires the B wave to have a retracement of more than 61.8%, and for that retracement to be somewhere between 80% and 100% if it is compared to the previous A wave. A flat structure will have two equal or almost equal legs and it will be formed before the appearance of an impulsive move. Those two equal legs however will be corrective, giving the first clue to the trader that a normal flat may be forming. There are three corrective waves that may be seen on a technical analysis chart, and of those three (zigzags, triangles and flats), the flat is the most complicated and diverse. There are three separate categories of flats and within each of those categories there are three distinct types of flats. As well as these nine separate flat varieties, there is a tenth special one, where the C wave ends below or above the A wave in a bearish or bullish trend respectively. A normal flat will have a B wave that is almost identical to the A wave in terms of price, and this is its primary feature. It is vital for a trader to remember that all of the considerations are made relative to the B wave’s ending point, not its lowest or highest point.
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When an investor needs to identify a normal flat, they need to be aware of the type of pattern that they are looking for and then be able to analyse the shape of the B wave in order to confirm their suspicions. It is therefore important for the trader to be aware of the previous wave (wave A)’s structure as there are particular retracement requirements for the B wave based on the A wave’s structure. The minimum distance that can be travelled is 61.8% as this represents the basics of the flat pattern. Should the market fail to retrace that minimum of 61.8%, the move that is being analysed cannot be a flat, but may instead be a zigzag.
If it is a double combination wave, formed from two simple corrective waves joined by an x wave, the retracement level must be at 80%. If the end is a running triangle, the B wave’s retracement level may be beyond wave A’s starting point, however the B wave may not end there.
Analysing the B Wave
The B wave is a corrective wave on its own and ends with either an irreversible or reversible pattern. Should it be reversible, it either be a flat with a lower degree failure or a running triangle at the ending point of a complex correction. Should it be irreversible, then a combination, double or triple zigzag should work and by the time the retracement level of 61.8% is reached, the trader should purchase call options. The expiry date is given by the pattern’s timeframe, so if this is on a 1 hourly to 4 hourly chart, even a short term expiry date can be used.
Complex Correction or Independent Structure
A normal flat can be either part of a complex correction or an independent structure in its own right. An investor can take a standard trend line, dragging it from the start of the A wave to the end of the wave B and by copying and pasting it to the end of the A wave resulting in a channel. Usually, the following C wave will be attracted by the channel’s opposite side, and if we remember that in a flat pattern the C wave will be an impulsive move, a trader can assume that the expiry date they should choose should be short.
There are 3 kinds of normal flats, with one ending exclusively in triangles and contracting triangles. In that type of flat, the C wave will be the longest of the entire formation, by more than 138.2% when it is compared to the B wave’s length, and ideally, it will be more than 161.8%. Another flat pattern is the common flat, a pattern of three waves all with the same length and being virtually identical. The most powerful flat however is the one with a failure for a C wave, meaning that the C wave cannot travel beyond the A wave’s end but it will travel a minimum of 38.2% and probably 61.8% of it. As the C wave fails to travel, this makes it a strong pattern representing a counter trend strength and therefore the option traded at this point should have a short expiry date, since the following move to the opposite direction will clearly be a powerful one.
Other educational articles
- How to Recognise and Use the Head And Shoulders Pattern in Binary Options Trading
- Introduction to Japanese Candlestick Formations
- What are Wedges in Binary Options Trading?
- Introduction to Fibonacci Retracements
- What is the Flag Pattern in Binary Options?
- “Information loss in volatility measurement with flat price trading.” (2007) Phillips, Peter CB, and Jun Yu.
- How to read the future: the yield curve, affect, and financial prediction. Public Culture, 21(2), pp.245-268 Zaloom, C., 2009.