A swing failure pattern (SFP) is a trend reversal indicator that can be used to discover a weakness in the current trend and identify early reversal signs.
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What Is a Swing Failure Pattern (SFP)?
Swing Failure Pattern (or SFP) is a type of reversal pattern in which (swing) traders target stop-losses above a key swing low or below a key swing high to push the price in the other direction by generating enough liquidity.
In an uptrend, there are repeated higher highs and higher lows but, at some point, the price fails to achieve a new high and, in a downtrend, prices fail to make a new low. This is a sign of a pattern shift.
The trendline must break through the previous high in a downtrend or the previous low in an uptrend for the pattern to be completed.
Traders utilize failure swings to plan their entry and exit. When a failure swing happens in an upswing, traders take a short position, and when a failure swing occurs in a downtrend, traders go long.
Experienced traders time their entrance to coincide with the creation of the second high before the failure swings in the downtrend.
The failure swing pattern provides an early warning of a trend reversal. Being able to detect it at an early stage will offer you a head start in planning a trade-off, which will benefit your portfolio.
The RSI failure swing is a great example to understand the SFP method. Introduced by J. Welles Wilder in the 1970s, the RSI failure swing helps in determining the change in price action and its momentum.
A relative strength index separation occurs when the price and the indicator split from each other, signaling a lack of trend momentum.
The same thing happens when an RSI failure swing occurs, with verification of trend shift on a breach of the indicator’s fail point. To execute more verified trades, one might wait for a failed swing to appear on the charts.
When the price line and the RSI line separate from each other, this is referred to as a failure swing. It denotes a drop in prevailing strength, particularly when the market is overvalued or oversold.
In a bullish cycle, the market hits the highest possible level or the overbought limit before slipping down. It then gets up again but fails to climb above the previous high, causing the trendline to form an ‘M’ shape. This is the point at which the failure swing occurs. In the case of an uptrend, failure to hit a higher high indicates that the present uptrend is deteriorating. Similarly, in a bearish market, the reverse occurs. The second peak fails to hit the lowest low in the overselling region and climbs instead.
There are different types of failure swing patterns that traders use in the financial world. There are M-shaped, W-shaped failure swings, in addition to failure swing top, non-failure swing, failure swing bottom, and non-failure swing bottom. Learning these swing failure patterns in addition to famous technical indicators will help you in making an entry and exiting your positions at the right time in the stocks, cryptocurrencies, or any major financial arena.