A Beginner’s Guide to Technical Analysis Using Flat Line Trading Strategy

Beginner’s Guide / 12.12.2020

In any financial market, the market trend is your friend. While trading in the financial markets such as the crypto market, there are numerous ways of doing technical analysis to determine the next market direction or establish ideal exit and entry points for a trade. 

Flat Line trading is one of the oldest and most efficient trading strategies perfect for determining a market’s exit/entry points. When integrated with the Average True Range (ATR), a flat line trading strategy allows you to precisely determine your exit strategy. In this guide, we’ll look at technical analysis using flat line trading strategy. 

What is a Flat Line?

A flat line is a line drawn through at least two closing prices. A flat line is a widespread pattern used by financial traders to determine the market direction. A flat line is drawn from right to left in a trend chart and connects two or more closing prices. 

A flat green line indicates that the closing price is on top, while a red line indicates that the closing price is at the bottom. When drawing a flat line, you’ll want to use moving averages for support and resistance along with the flat lines.      

Using the Flat Line Trading Strategy

In cryptocurrency trading, the flat line trading strategy can be employed effectively using the support and resistance lines. The first step in employing this strategy is to establish whether the crypto asset in question has crossed or is approaching to cross the point of resistance or support. 

It would be best if you then were patient enough for the asset to begin its correction. If this occurs, the next step is to wait for the asset to attempt and retest the second time’s resistance or support line.

If the price correction and retest don’t occur within a short time, this strategy may not be effective. For instance, if you’re using a 1-minute or less time frame chart, the price retest and correction need to occur ten or fewer minutes from the initial testing of the resistance/support line. 

The asset should also indicate flat support or resistance line and should be lying within a channel. While the difference is faint, it can be noticed if you keenly look at the chart. An asset can be trading within a tight range, but there can still be slight changes in the price. A flat line needs to display a precise horizontal line across the chart’s face for this strategy. 

The final step in the flat line trading strategy is to enter a trade once all the previous signals have occurred in the correct order as explained above. However, the type of trading you’ll enter is dependent on the level of support or resistance line. When the support line is at the bottom of the trading chart, you should execute a buy option. 

On the contrary, if the market conditions surround the resistance line, you would want to sell the asset. Nonetheless, your overall trading decision should be in line with technical indicators used in combination with the flat line trading strategy. These indicators include the ATR, Moving Averages, and Fibonacci Retracements. 

Technical Indicators used in Combination with Flat Line Trading Strategy

  • Average True Range (ATR)

One of the most popular indicators in crypto trading is the Average True Range technical analysis indicator. This indicator is the average of true ranges over a particular period, and it’s used to measure the volatility of a crypto asset using gaps in the price movement. 

ATR is calculated using price points in 14 periods, i.e., intraday, daily, weekly, or monthly. Crypto assets experiencing a higher volatility level have higher ATR, while those experiencing low volatility levels have lower ATR. 

ATR combined with flat line trading strategy can tell you precisely when to enter or exit a market. While ATR doesn’t indicate the price direction, it’s essential for determining asset volatility-a crucial factor in crypto trading. 

  • Ichimoku Cloud Indicator

The Ichimoku Cloud indicator is an efficient technical indicator for trading cryptocurrencies. 

The indicator includes multiple lines and is versatile, meaning it can be used for various functions, including defining support and resistance, identifying trend direction, gauging market momentum and behavior, and lastly, providing clear trading signals with a high probability of success. Ichimoku cloud indicators can be used in conjunction with flat lines to provide dynamic support and resistance. 

  • Fibonacci Retracements

Fibonacci Retracement is flat horizontal lines that indicate resistance and support levels. These levels are based on the Fibonacci number, where each level is associated with a percentage. 

Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. The percentage indicates how much the price has retracted and can be drawn between any two significant price points, i.e., a high and a low. The indicator will then establish true levels between the two points. 

The Fibonacci Retracement indicates potential price movement reversals during a strong bull run. It can be used combined with a flat line trading strategy to provide accurate confirmations of the asset’s price levels before a retracement.  

Examples of Flat Line Trading Strategies

There are different flat trading strategies, and you should choose one that matches your investment strategy. Also, when choosing an ideal flat line trading strategy, be sure to be keen on two main principles: 

  • Since trading is performed inside the channel, you’ll want to use tools to help you build a trading channel confined within the flat zone.
  • Use a technical indicator to confirm the right price direction after the rallying from the flat zone channel border. This is to avoid false signals. 

Flat Line Trading Strategies include: 

  • Using envelope indicators combined with MFI indicators to filter out signals
  • Use Bollinger bands combined with moving averages.
  • Use the WSO & WRO channel with fractal dimension Ehlers.
  • Use the percentage crossover channel indicator combined with the TrendRange-based filter.
  • Use price channel indicators with the RBVI-based filter.

Conclusion

As a crypto trader, it’s crucial to understand technical analysis aspects to enter profitable trades. Flat Line trading strategy has been there for quite a long time now, and it’s very effective in determining ideal market entry and exit points. 

This is especially common when combined with other technical indicators such as ATR and Ichimoku Cloud Indicator. By learning how to use the flat line trading strategy, you’ll certainly take your crypto trading skills to the next level.     

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.