When I used muslins I used to do a similar fold to this where you set it similar to a prefold and then roll in the edges.. so basically, fold int hte corners as you do now , and as if your going to then fold into thirds.. instead of folding.. When baby is lying down on the muslin , roll the sides in at an angle and fasten the same way as you normally would. I used muslins with a roll edge until baba was around 2 months old .. you need to do it tight enough at the legs for any of the flats to work effieciently, and knowing how much the nappy moves and how tight you can get it, comes with practice.
I started with a single muslin.. then went to two musins folded together then I used them as boosters to the nappies I then made. Good quality muslins are a fabulous absorbent nappy, and folded right you can get the same amount of layers as you would in a prefold. ie the origami fold.. which is great on newborns with a muslin.. not quite so great for containment though!!!!
Another thing is to make the initial square more of a rectangle shape to allow enough muslin to be folded over at the back to produce another *poo envelope* ..
.. like this... http://www.littleturtleknits.com/sidewallpf.htm
Stretchier fabrics work well .. as they give the elasticity throughout the fabric for a really great fit
ps.. I LOVE flat nappies