Trading Flat: Definition, How It Works, and Types of Situations

Understanding Flat

Flat, in the securities market, is a price that is neither rising nor declining. Under fixed income terminology, a bond that is trading without accrued interest is said to be flat. In forex, flat refers to the condition of being neither long nor short in a particular currency, and is also referred to as "being square."

Key Takeaways

  • A trading flat generally refers to a situation in which a market or security is neither rising nor declining in price or valuation.
  • Within the context of a securities, it refers to markets that do not provide much opportunity for profits. Traders can make profits by trading individual stocks rather than indices in such markets.
  • In a bond market, a trading flat is when bond buyers are not responsible for accrued interest payments.
  • In forex trading, a trading flat is when opposing positions taken by a forex trader cancel each other out leaving them with a flat book.

Understanding Flat Stocks

When the stock market has made little to no movement over a period of time, it is said to be a flat market. This does not mean that all publicly traded securities in the market are making no significant movements. Instead, the increasing price movement of some sector or industry stocks may be offset by an equal declining movement in the prices of securities from other sectors. Investors and traders looking for profits in a flat market are better off trading individual stocks with upward momentum, rather than trading the market indices.

Individual stocks can also be flat. For example, if a stock over the last month has been trading around $30, it can be thought of as trading flat. Writing covered calls is a good strategy to profit from a stock that stays flat or goes down modestly.

Understanding Flat Bonds

A bond is trading flat if the buyer of the bond is not responsible for paying the interest that has accrued since the last payment (accrued interest is usually part of the bond purchase price). In effect, a flat bond is a bond that is trading without the accrued interest. The price of a flat bond is referred to as the flat price or clean price. Typically, flat prices are quoted so as not to misrepresent the daily increase in the dirty price (bond price plus accrued interest) since accrued interest does not change the yield to maturity (YTM) of the bond.

A bond also trades flat if interest payment on the bond is due but the issuer is in default. Bonds that are in default are to be traded flat without calculation of accrued interest and with delivery of the coupons which have not been paid by the issuers. Also, if a bond settles on the same date as the interest is paid and, therefore, no additional interest has accrued beyond the amount already paid out, the bond is said to trade flat.

Flat Position in Forex Trading

Being flat is a position taken by a trader in forex trading when they are unsure about the direction of currencies trading in the market. If you had no positions in the U.S. dollar or your long and short positions cancel each other out, you would be flat or have a flat book. The flat position is considered a positive position, given that although the trader is not making any profits by standing on the sidelines, they are also not making any losses.

A flat can also refer to a trade in which the currency pair has not moved significantly up or down and, therefore, has no large gain or loss attributed to the forex trading position. Since a flat price stays within the same range and hardly moves, a horizontal or sideways trend can negatively affect the trade position.

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