What Are Failure Swings & How To Trade Them

In his book, J. Welles Wilder, New Concepts in Technical Trading Systems describes strong market reversals. He used the RSI (relative strength index) to measure these swings. He then gave these sharp price movement names of failure swings. There are plenty of indicators like the MACD, CCI, RSI, and the Stochastics that are plotted separately on the chart. They all give failure swings. However, almost all technical indicators show failure swings in one form or the other. Failure Swing occurs when the price trend fails to set new highs in uptrend or meet new lows in a downtrend. This pattern helps traders decide when to enter and exit the market.

What are Failure Swings?

According to J. Welles, failure swings mostly occur in momentum oscillators because they show price movements in a specific range (mostly 0 to 100). Due to this, they give overbought and oversold conditions. These conditions are the signs of a weak or strong trend in the future.

For instance, in an uptrend, most momentum indicators reach overbought levels and present that the price reversal is about to happen. However, when the indicator does not reach that level, it creates an M pattern and does not create higher highs. This, according to the author, is a failure swing.

Conversely, in a downtrend, the momentum indicators reach their oversold level and signify a market reversal. But, when they fail to reach that level, or the market doesn’t reverse, it makes a W pattern, and it’s a failure swing.

Bullish and Bearish Failure Swings
Bullish and Bearish Failure Swings

To identify failure swings, traders must remember a few points:

  • The price must break through the previous period high in a downtrend or last period low in an uptrend for the pattern to be completed.
  • Point A is the last low point in a downtrend or the previous high point in an uptrend.
  • Point B is the first high or low point of the current trend.
  • Point Cis higher low than Point A in a downtrend or a lower high in an uptrend.

How to use Failure Swings?

Traders usually use failure swings as a part of a reversal strategy. When there is an uptrend, a trader could confirm the failure swings and enter short positions in anticipation of a trend reversal. On the other hand, a trader could confirm the failure swings and take long positions when there is a downtrend.

The entry points occur when there is a recent trough in an uptrend. Traders can then take positions at this trough with stop-losses near the recent low. Contrarily, in a downtrend, entry points appear when there is a recent peak. Traders could take positions at this peak with stop-losses near its recent high.

Failure swings can also pinpoint exit points. When in an uptrend, a trader may choose to exit the trade on low, and in a downtrend, a trader may decide to exit the trade on high.

Failure Swings trading strategy

A failure swing is used to enter positions in anticipation of a trend reversal. In other words, a position is taken against the current trend. The entry point is signaled when the low swing that the indicator made just before the failure swing in an uptrend, or the peak that is formed just before the failure swing in a down trend, is taken out by the subsequent movement of the indicator. In an uptrend, a short position is initiated and in a down trend a long position is initiated. These points can also be used to exit a position if you are already long in an uptrend or short in a down trend.

A bearish Failure Swing is a double top, the second peak being lower than the first one. A bullish Failure Swing is a double bottom, the second bottom being higher than the first one.

The idea of the pattern is that the shorter second part of the pattern demonstrates such a low market interest to the preceding movement that market players do not even want to test the tip of the first peak or bottom.

As failure swings occur in almost every indicator, traders can take advantage of making them part of their trading strategy. It can be used on every timeframe, so both long-term and short-term traders can benefit from them.

Failure Swings buy strategy

  • Look for the failure swings in a downtrend.
  • Wait for the price bar to go bullish before entering.
  • Enter the trade at the recent trough.
  • Place a stop-loss near the recent low.
  • Exit the trade on high.

Failure Swings sell strategy

  • Look for the failure swings in an uptrend.
  • Wait for the price bar to go bearish before entering.
  • Enter the trade at the recent peak.
  • Place a stop-loss near the recent high.
  • Exit the trade on low.

Failure Swings conclusion

The failure swing pattern is a type of reversal pattern that can be used as buy or sell signals. In an uptrend, we see a series of successive higher highs and higher lows but there comes a point when the price fails to make a new high. In a downtrend, prices fail to make a new low.

Failure swings are a part of trading. They can be seen as reversals, but they mostly emerge when the momentum indicators are in use. To fully utilize failure swings, traders can combine them with other forms of technical analysis.

Failure Swings can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

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