Flat: reasons and trading strategies

Theory
03.01.2024
10 5 0

A sideways trend, consolidation, or flat is a neutral state. This is when asset prices fluctuate in a narrow range over a long period without changing the trend. Sideways markets are usually described by support and resistance areas where the price fluctuates.

Causes of a flat

Like uptrends and downtrends, sideways movements have their own technical and fundamental causes. These are:

  • uncertainty or the absence of important events that lead to a sideways trend;
  • equality of supply and demand. Prices remain stable, causing a sideways movement;
  • profitable support and resistance zones — many market participants see them and open positions based on these levels. At such moments, the market is dominated by buyers or sellers.

Hedge funds and other large participants often use consolidation to form a huge position with an adequate average purchase price. The most standard volume indicator will help to identify such purchases — trading volumes above the average indicate the emergence of such a participant.

How to identify a sideways trend

The best solution is graphical analysis. It is enough to draw support and resistance levels on the chart. The correct levels should cross at least 3 points and form a horizontal trading channel.

You can also use moving averages (MAs), but they are more difficult to spot.

Trading strategies on a sideways trend

Trading from levels

If the price regularly bounces off support and resistance levels, traders can buy the asset when the price approaches the support levels. Then sell when the price approaches the resistance levels. Stop loss levels should be set slightly above or below these levels in case of a breakout. This strategy should be used with maximum focus. You can open a position only when the asset indicates that the price will stay within the horizontal channel.

But it’s important to be as careful as possible and keep in mind the bull and bear traps. In a fake breakout, the market simply collects the stops of short-sighted traders.

This strategy is perfect for any short-term trader or swing trader.

Trading on the breakout of levels

Ideally, you buy from the support level in anticipation of a full breakout of the resistance level. This trade is ideal for medium-term traders. Short stops will reduce the risk and collect profit in time.

You can also open a position at the moment of a consolidation breakout. This will be confirmed by the increased volume and closing of a long candle outside the sideways channel.

These and other strategies can be used on Movo.

Conclusion

A sideways trend is a period of uncertainty in the market that can be long or temporary. Understanding and recognizing sideways trends helps traders to adapt their strategies and make emotionless and rational decisions.

Download the App

Share

Related posts