What is Swing Failure Pattern (SFP)?

Swing failure patterns (SFPs) are reversal patterns in which traders seek for stop-losses above (or below) a major swing low (or high) to produce enough liquidity to force the price to go in the other direction.

When there is an uptrend, higher highs and higher lows are repeated. However, eventually, the price fails to accomplish a new high. On the other hand, when there is a downtrend, it fails to accomplish a new low. This signals the occurrence of a pattern shift. In order for the pattern to be completed, the trendline must break through the previous high in a downtrend (or a low in an uptrend).

Swing failures are used by traders to plan their entry and exit points. Traders take a short position when a swing failure occurs in an uptrend. On the contrary, they take a long position when a swing failure occurs in a downtrend. Traders with experience tend to time their entry to coincide with the formation of the second high before the downtrend's swing failure.

The swing failure pattern signals a trend reversal before it happens. Being able to spot it early on will give you a heads up on the competition when it comes to negotiating a trade-off that will benefit your portfolio.

The RSI swing failure introduced by J. Welles Wilder in the 1970s is a great example of the SFP. RSI helps to determine the price action's shift and its momentum. 

When the price and the indicator diverge, a relative strength index separation occurs, signifying a lack of trend momentum. When an RSI failure swing occurs, the same thing happens with trend shift verification based on a breach of the indicator's fail point. You should wait for the swing to appear on the charts before executing verified trades.

A failed swing occurs when the price line and the RSI line diverge from one another. It indicates a decrease in the market's current strength, especially when the market is overbought or oversold.

There are various swing failure types in the world of finance:

• M-shaped
• W-shaped
• Failure swing top
• Failure swing bottom
• Non-failure swing
• Non-failure swing bottom

In a bullish market, before slipping down, the market reaches the highest possible level or the overbought limit. Then it rises again but fails to reach the previous high, forming an 'M' pattern in the trendline. It is at this point that the swing failure occurs. Failure to hit a higher high in an uptrend suggests that the current uptrend is failing. 

In a bearish market, it is similar but it happens in reverse. When the indicator reaches the oversold level or its lower point, it rises and then falls back to the lowest low, forming a swing failure pattern. It does not, however, hit the previous low because it rises again, forming a 'W' pattern.