Flat trading basis: oscillator

“Flat” is a common market position that occurs within or after strong trends. During flat periods, bulls and bears take a breath to decide where to drive the price. Flat trading provides numerous opportunities for opening and closing positions. In this article, you will find indicators and strategies applied when trading flat.  

When you doubt you should learn new strategies and approaches, remember Rakesh Jhunjhunwala, one of the most successful stock investors and traders in India. He believes in learning from mistakes. His famous phrase is, “Mistakes are your learning friends. The idea is to keep these mistakes small.”

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What are flat conditions?

A flat is a situation in which the price neither rises nor falls. It fluctuates within a range, as neither buyers nor sellers have the strength to drive the market. 

Such a situation may happen due to several reasons. Sometimes, there are no important events that would drive the price. In some cases, traders don’t enter the market waiting for vital events that can drive the price either way. Or traders may lose interest in an asset that trades flat, so the price continues trading flat for longer. There are also markets with low volatility. Low volatility causes a lack of solid trends. Thus, a flat price is a normal market condition.

Defining flat periods: oscillators 

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Some oscillators can confirm periods of flat trading. For instance, the Relative Strength Index is usually used to display periods when the price is overbought or oversold. For this, the indicator should be above the 70 level or 30 level, respectively. However, when the indicator fluctuates within the 30-70 range for a certain period, it’s a sign that the price fluctuates. 

Another oscillator that can be implemented is the Accelerator Oscillator. This indicator measures the likelihood of the momentum continuation. It consists of bars that move around the middle line. When the bars come closer to this line and fluctuate around it for a long time, it reflects the periods of price correction. 

Swing trading patterns and strategies

Although it’s believed that highly volatile markets provide more opportunities for rewards, high volatility bears risks. Flat trading may seem unprofitable, but you can make the most out of it if you know what strategies and indicators apply. 

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You may be confused, as swing trading is a separate trading strategy. However, swings occur after and even within periods of price correction. Thus, flat and swing trading are connected.

Swing trading is based on chart patterns and indicators that signal a high probability of the trend change. Read on to find examples of technical analysis swing trading strategies. 

1. Support and resistance

In flat trading, the price moves within a range framed with support and resistance levels. The range size may differ. When the price moves within a narrow range, swings won’t provide opportunities for successful trades. However, if the range is wide, you can apply the support and resistance strategy. 

The idea is simple: open a trade when the price rebounds from either support or resistance level. To confirm that levels are reliable, you should wait for the price to touch them at least twice. 

Open a sell position at the resistance level. Place a stop-loss order slightly above the resistance boundary. Place a take-profit order at the support level. A similar strategy can be used for a bullish trend. Open a long trade at the support level and place a take-profit order at the resistance level. A stop-loss order should be set slightly below the support line. 

2. Fibo retracements 

This strategy is reminiscent of the previous one because the Fibonacci retracement indicator determines support and resistance levels. The most common Fibo levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

After a bullish trend, the price is supposed to correct within the 0%-50% range with 0%, 23.6%, 38.2%, and 50% levels serving as support and resistance boundaries. When the price falls below the 50% level, the correction ends. Thus, a trader may expect a price reversal. 

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After a bearish trend, the price is supposed to correct within the 0%-50% range with 0%, 23.6%, 38.2%, and 50% retracements serving as support and resistance levels. When the price rises above the 50% level, the correction ends. A trader may expect a trend reversal. 

The idea is similar: you should buy when the price rebounds from the support level and sell when it reverses from the resistance boundary. 

3. Reversal patterns

Another option for combining flat trading and swing strategy is to trade on reversal patterns. The patterns form at the end of the trend. It’s a well-known fact that the price corrects for a while before it forms a new trend. This is a period of flat trading. When the price confirms a reversal, it’s an opportunity to apply the swing strategy. 

The most common reversal patterns are head and shoulders, inverted head and shoulders, double top/bottom, triple top/bottom, and falling/rising wedge. The price movements within any of these patterns will be considered flat trading. 

The idea is to open a trade after the pattern is formed and indicators confirm a trend reversal. Every pattern has its own rules that define the intensity of the price movements after the trend reverses. To apply reversal patterns for swing trading, you should define which of them suits you the most and what rules they imply. 

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The advantages of using oscillators

In trading, oscillators use equilibrium, demand, and the theory of supply to predict a price. After that, they rely on some of the “Random Walk Hypothesis” principles to create a fair value price within a specified time.

Imagine that the price of an asset is attached to the core fair value using a rubber band. Sometimes, those prices will begin swinging from the fair value, creating tension in the band. This will eventually pull the price back to its original fair value. That being said, this event will create temporary momentum, mispricing on one side as it goes past the fair value.

Oscillators were created to bring some sort of balance. They measured the core fair price, along with the swings that it made away from it before returning to its original point. What the algorithm found was that the motion never settled and that it always swung from one side to the other – top to bottom.

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The oscillator determined the trading value, identifying the exit and entry points. The technical analysis was used to capture market trends, signaling when an asset was being overbought or oversold. It also signaled the investor when they were about to experience losses as a result of changes in the momentum.

Oscillators are very useful in dictating when an asset should be bought or sold. They signal opportunities, and with the right trading strategy, they can lead to significant earnings.

Risks of oscillators you should know about

While there are several advantages to using oscillators, one should also acknowledge the risks. These can include:

·  Trading models provided by oscillators are not to be seen as absolute. The traders need to use judgment when applying them.

·  Oscillator trading models are often in conflict with certain economic fundamentals. The users of the oscillator must determine exactly which one they wish to follow.

·  Oscillators can’t anticipate factors that are unknown or unexpected. If there are any changes or events in the marketplace, the oscillator can’t know beforehand. You will have to deal with these events separately by creating an investment thesis.

·  Trading models are not to be used in automated trading, as their data is not always accurate. It still requires intervention from humans.

While great for formulating a plan, oscillators don’t always have the most reliable data. If you use the trading model without checking it first, you might put yourself at risk.

Takeaway

Although flat trading doesn’t seem profitable, it’s a vital part of price movements. One of the key characteristics of flat trading is low volatility. However, if you know how to combine flat market conditions with technical analysis and swing trading strategies, you will be able to make the most out of them.

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