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A normal flat pattern requires the wave b to have the level of retracement higher than 61.8%, or more precisely, to have the level of retracement between 80% and 100& in the cases when it is compared with the previous, the wave a. Besides that, it should also be remembered how flat the structure actually looks like and this is coming in the form of 3-3-5 which is marked with the letter a-b-c.
In the case of normal flat, it needs to be said that it has two equal legs or two legs that are almost equal most of the time and it is formed before the impulsive move comes. However, these two legs are corrective and this is actually the first sign that the possibility of normal flat being created has appeared.
Nine Types of Flat Patterns
This type of the pattern is corrective one and out of the three corrective waves that actually exist (the triangle, the ZigZag and the flats), the flats are actually the most diverse as well as complicated in the sense that three different categories of the flat patterns that actually have three types of the flats each. Besides those nine types, the flat patters have also the special one and in that type the wave c is ending below the wave a in the bearish trend and above the wave in bullish trend.
The wave b with normal flats is identical with the wave a in terms of the price and this is the main characteristic of the wave b. it is important also to mention that all that has been said about the wave b is relative to the end of the wave b rather than to its highest or the lowest point.
Identifying the Pattern
The identification of the type of the pattern that you are looking for is that more important after which comes the analysis of the wave b. While we are doing that it is very important to know the structure of the wave that can before, or more precisely, the structure of the wave a. Considering the structure of wave a, there are certain specific requirements for retracement of the wave b.
In that regard, the minimum distance for the wave b to travel is 61.8% as it is familiar from previous articles and this fact is the basis in the flat patterns. In the cases when the market actually fails to retrace 61.8%, then move that you are analyzing in that moment is definitely not the flat pattern but rather the zigzag pattern.
If it happens that the wave a is actually the double combination or the complex correction that is created by two simple corrective waves and the wave x, the retracement level in that case will go up to 80%. If that wave ends with the running triangle, the level of retracement for the wave b might be beyond the starting point of the wave a because the running triangle is opening possibility for that. However, this does not have to happen in all cases because wave b does not have to end in that position.
The wave b is the corrective wave and because of that the ending of that wave is the ending with the reversible or with the irreversible pattern. In the case when it is the reversible it should be a flat pattern with the failure on the lower degree or the running triangle that appears at the end of the complex correction. In the case when it is the irreversible, the double or even the triple zigzag pattern or the combination might be sufficient to do the business by the time the wave b reaches the retracement level of 61.8% we should buy call options.
The expiration date is determined by the time the time frame that it takes the pattern to form and if the time frame is from 4 hours to 1 hour, the short-term expiration dates should be used. The expiration dates of end of the day or even end of the week are also possible in the cases when the bounce from the retracement level of 61.8% is violent and quick and if the price action if happening in the second part of the given week.
Complex and Independent Flat Patterns
Just like it is the case with any flat pattern, the normal flats are actually part of the complex correction and they can be of independent structure. In that case, the trader should take the regular trend line and take it from the beginning of the first wave all the way until the end of the second wave, or the wave b any by copying and pasting the trend line at the end of wave a, the channel will be resulting.
Usually, in that situations, the wave c that will follow the wave b will be attracted to the opposite side of the given channel and taking into consideration that in any type of the flat pattern the wave c is actually the impulsive move, then we would realize that the expiration date determined for the option needs to be short mainly because the impulsive moves indicate that the price is moving really fast.
Flats in Ending Triangles
When we talk about the category of the normal flat patterns, we also need to mention that there are three types of the flat patterns and one is exclusively appearing in ending triangles as well as in contracting triangles. In this case, the wave c is the longest wave in the entire structure with more than 138.2% when this kind of wave c is compared to the wave b and its length which is 161.8%.
When discussing these issues, it is also important to remember that certain time constraints also exist because the normal flat patterns will usually the time that has been taken for the wave c will be almost the same with the time that has been taken for the wave a and for the wave b combined. This information is very useful in cases when the trader is determining the expiration date any type of the options that he or she might trade.
Besides already mentioned, there is another category of the flat patterns are this category is called the common flat patterns and it implies that all three waves, the wave a, the wave b and the wave c have the same length and all three waves are identical.
However, the most powerful flat pattern is the pattern that has the failure for the wave c which indicates that the wave c will actually fail to travel any further than the end of the wave a. However, in this case the wave c is traveling minimum 38.2% of the wave and it is most likely that it will be 61.8%.
The failure of the wave c to travel makes this type of the flat pattern very strong it is actually a sign of the strength of the counter trend and because of that, the options that will be traded in this case need to have shorter expiration date than in some other cases because the move that will follow in the opposite direction is of great power.
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