Did you ever notice that sometimes the prices of currencies appear trapped, like they are stuck in neutral? This is called a flat market or sideways market, which is defined by prices trading within a limited range with no identifiable trend emerging.
Here's an example: You're watching EUR/USD. It has traded between 1.1000 and 1.1020 for the past five days, going back and forth like a tennis ball bouncing between two walls. That, my friends, is a flat market.
To better illustrate this for beginners, think of a student whose scores in exams continue to fall from the 70-75 point range. With every exam, the student's scores remain in the range of 70-75 points. The student's exam performance is similar to currency pairs in flat markets, in that the performance range can be predictable.
Understanding flat markets is important for forex traders because flat market conditions occur more frequently than one realizes. Learning how to identify flat market conditions and how to trade them will prepare you to take advantage of these, as some would consider, "boring" market conditions, and avoid the traps that inexperienced traders often fall into.
What is a Flat Market / Definition of Flat Market
The term flat market is also often referred to as a sideways market or even trading range, which occurs when price remains focused within a certain range (between support and resistance levels) without making any significant new highs or lows. In contrast with a trending market, which has observable movement in a (upward or downward) direction, a flat market means the price doesn't move to a point of either reaching or placing a significant high or low; instead, we see horizontal price action with little or no volatility.
Professional Example: The GBP/USD trades within 1.2800-1.2850 for 10 consecutive days, with an ADX focus of under 20; this symbolizes a flat market.
Beginner Example: You can relate this to a video game player who scores between 2000-2050 points, over multiple times playing this game. This demonstrates stability and distanced performance, but no significant upward or downward direction.
Reasons for Flat Market
Interestingly enough, it is extremely helpful to know why the market is flat, and to be able to forecast how long the market may be flat, and which potential direction the market may break out. There are quite a few fundamental and technical reasons for a market to go into a sideways or flat market.
Steady Market Equilibrium Between Bulls and Bears - If buyers and sellers have equal strength and conviction, neither side can seize control. This causes the market to stay in equilibrium and result in a tug-of-war effect therefore prices will remain restrained and within range. When traders are doing this, it is considered "price discovery" by the professionals. Essentially, the market keeps trying to find a fair value by repeatedly testing support and resistance levels.
How to Identify a Flat Market
Identifying flat markets is far from easy, but if you have a systematic process that combines multiple technical analysis tools, you will be more successful. Using only one way to identify a flat market can lead to false signals, which is why professional traders utilize a comprehensive identification process for flat markets.
Professional Example: The EUR/JPY have been trading between 1.1200-1.1230 comfortably for two weeks; ADX at 15, contracting Bollinger Bands, and volume readings at 30% lower than the previous 20-period average provided clear confirmation all indicated flat market conditions.
Flat Market Risk Management
Professional Example: Selling the EUR/USD range trade between 1.1000-1.1020 results in a variety of profitable trades over the span of two weeks. The trader's approach is to buy at 1.1005 (close to support) with a 15-pip stop loss and take profit level, where they achieve a success rate of 70% over 10 trades.
Beginner-Friendly Example: At a school auction, I notice many of the items are selling in the same range of $50-60. I start to buy items near $50 and sell them for $55-60, consistently taking smaller amounts of profit while staying away from the fright of items with any random price move.
Breakouts and Risk Management
Whenever you are trading in a flat market, there will be breakouts that occur, it is the nature of trading. When analyzing breakouts and the market, it is crucial to understand that managing your risk is the most important design. Risk management helps to not only protect your capital but will allow you to potentially profit from new trending movements.
Conclusion
Acquiring the skills to trade flat markets is an essential milestone in acquiring a full skill set for forex trading. In this guide, we have shown how flat markets are great for traders to take a profit as they may appear to be simple but consistently offer profit opportunities to traders who understand this in flexibility.
The forex market spends 70% of its time in sideways/range-bound conditions. By becoming proficient at trading in flat markets, you'll be able to profit from the majority of market conditions and develop the patience and discipline necessary for successful long-term trading.
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