Failure Swing Pattern?

Last Updated: 5 Jul 2022

The stock market is an ocean that is better to dive into when you know how to swim. The market is typically analyzed using two approaches: fundamental analysis and technical analysis. Technical analysis helps predict price movements by analyzing historical data of stock price and volume. It is critical as it gives an early indication of the stock’s future. The Failure Swing pattern is an important technical trend used in overbought and oversold phases.

What is Failure Swing Pattern?

Following the trend while trading is a traders rule of thumb. Failure Swing is one of the trend reversal patterns. Trend reversal refers to going against the trend. It is useful for building a trading strategy when there is a reverse trend in the market.

The Failure Swing concept was developed by Welles Wilder, Jr. in the book ‘New Concepts in Technical Trading Systems.’ It is one of the most reliable identifiers of a trend reversal. This concept is related to an index, named the ‘Relative Strength Index.’

The Relative Strength Index. is a technical indicator aimed to reflect the current and historical position of stock on the closing price of the current trading period. An RSI is a momentum available in almost all technical analysis software. Failure Swing occurs when the price line deviates from the RSI line.

Welles Wilder Jr. mentioned in the book, “Failure Swings above 70 or below 30 are very strong indications of market reversal.

How to trade with a Failure Swing?

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. Usually, traders enter in the downtrend i.e. lower price highs and lower price lows, and exit in the uptrend situation i.e. higher price highs and higher price lows. Thus, traders go against the current trend. This helps the traders take advantage of early trend reversal indicators.

Types of Failure Swing

• Failure Swing Top: This occurs when the stock price goes higher whereas the RSI fails to make a higher high and falls below the recent fail point. The Fail Point is where the RSI line is below the recent swing low. This Failure Swing indicates a short position.
• Failure Swing Bottom: This occurs when the stock price gets lower whereas RSI fails to make a lower low and rises over the recent fail point. Fail point is the point where the RSI line is above the recent swing high. This Failure Swing indicates a long position.

Final words:

The Failure Swing pattern is not 100% accurate. Although, it is the simple and efficient pattern that gives an idea that the trader is in the right direction. The Failure Swing is one of the effective methods to recognise the weakness in the trend by reversing the current trend. Understanding and implementing this pattern aids in achieving higher profits.

Frequently Asked Questions

How do you determine swing pattern failure?

Failure Swing occurs when the price line deviates from the RSI line. Traders enter in the downtrend, and exit in the uptrend situation.

What is a bearish Failure Swing?

A bearish Failure Swing is a phase when stock prices reach the lowest low, the second peak fails to reach that level and increases. It indicates entry or long position.

How to use it in Forex Trading?

Failure Swing shows the path of least resistance for the traded currency pairs in forex trading. Based on that input, you can perform the appropriate Forex Trade.