WHAT IS 'Flat On A Failure'

Flat on a failure is a financial term that refers to a specific closing situation where a security hits but does not exceed a target level.

BREAKING DOWN 'Flat On A Failure'

Flat on a failure is when a trader chooses to close out a position on a security and take the profits when the security in question moves up to a target level but fails to break through it.

A breakout refers to an instance in which the price of a security moves past a previously identified resistance level. When a trader goes flat on a failure, they have tracked a security and purchased it with the belief that its value will increase and break its current proposed resistance level. But because securities do not break a resistance level at each approach to said level, a trader may not see the increase they anticipated when purchasing the security. If that is the case, the trader can choose to hold on to the security, taking a longer position and hoping that the next time the security approaches the resistance level it breaks through and reaches the originally anticipated price. Otherwise the trader can choose to sell the security for some profit, though not as much as anticipated had the security broken through. The latter option is called going flat on a failure. By going flat on a failure, the trader chooses a method that can extract the profit a trade has produced, while moving on to a potentially more lucrative situation. A trader deploys the flat on a failure strategy when they believe the security most likely will not move past the target level.

An Example of Flat on a Failure

For example, suppose that a trader trades on the forex market in currency pairs. The forex market, or the foreign exchange market, is where traders buy sell and speculate on currencies and is the largest and most liquid market in the financial world. On the forex market, currencies trade in currency pairs, essentially a quotation of two different currencies with the value of one currency based on that of the other. The currency listed first is the base currency and the second is the the quote currency. The trader in this situation has a long position on a specific currency pair and the exchange rate moves upward in the trader’s favor only moderately. The currency pair does not move past the proposed resistance level. The trader expected the resistance level to catalyze an even greater increase, which does not occur. The trader in this case could deem the trade flat on a failure and close the position, taking whatever profit the currency pair has thus far earned.

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