The flat pattern is the second fundamental Elliott Wave corrective structure. In this educational article, we will review the guideline to trade the flat structure.
Flat pattern is an Elliott wave corrective structure built by three waves, and its internal sequence is 3-3-5. There exist a single model to trade a flat formation. The following chart shows the trading setup of a flat corrective structure.
From the basic model, the entry is given once price action breaks and closes above wave 4 labeled in blue, of wave (C) labeled in black. The profit target is placed in the same way as the zig-zag trade setup. It is at 100%, 127.2%, and 161.8% of the Fibonacci projection of waves ((1)) and ((2)) labeled in red. The invalidation level is under the end of the wave (C).
Trading the flat pattern
Before to define place an order, we must answer the question, “Do I see some Elliott wave pattern?”.
In the example, the IBM (NYSE:IBM) in its 8-hour chart shows a first five waves bearish sequence started on April 10, 2014. Once IBM founded buyers on January 29, 2015, at $149.52 per share, the price developed a three waves movement as a flat pattern, which ended at $176,25 on May 04, 2015.
If our hypothesis is correct, it is the Elliott wave pattern recognized is a flat structure, we can do our trading plan. The entry should be placed after the completion of the second wave (B) or (2) labeled in black degree.
The short position is triggered after the breakdown and close below the last swing at $168.75. The target is defined using the Fibonacci projection between (A) and (B) waves. In our example, IBM reached the first target at $126.53 on 100% of the Fibonacci projection.
The third part of the trade is to manage the risk of the trading plan. The first stage is to reduce the risk; for this stage, we set the invalidation level above the end of wave (B) or (2) at $176.25. Once IBM plummets, we eliminate the risk after the price drops into the 61.8% of Fibonacci projection at $145.60.
Finally, we have to protect the open profits, for example, each $5 of advance, we can move the protective stop each $5 of progress.