This article is devoted to a special tech analysis pattern in Forex and the stock market that can be found on a good half of reversals of trend and correctional movements from M1 to MN. However, right because of this frequent emergence, the main task of a trader is to distinguish between a Failure Swing that will bring them a profit with more than 50% probability and a mock Failure Swing.
Description and examples of Failure Swing
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.
Here are some simple examples:
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.
Nonetheless, classically speaking, an uptrend is considered in action when its highs and lows increase consecutively; similarly, a downtrend is considered acting when the lows decrease one after another. However, when a bullish Failure Swing appears with an increasing instead of decreasing high, this means that the downtrend is at least slowing down.
And when the price break through point 2 from below, the trend is considered ascending. With a bearish Failure Swing, the situation is the same: when the bottom point is broken through from above – the trend is already considered descending. Of course, all this is just hypothetical, in Forex as well as in the futures or stock markets. Any trading signal is hypothetical. The trader’s task is to make the probability come true.
Requirements to a highly probable Failure Swing
For a Failure Swing to be able not only to slow down the movement in which it has appeared but also to really push the price in the opposite direction, the pattern needs time. Particularly – no less than 30% of the time that the preceding uptrend or downtrend took to develop.
However, the time can work either on generating force for a reverse movement or banal consolidation for going in the previous direction. So, a highly potential pattern must demonstrate changing dynamics of price movements.
As for a bearish Failure Swing, the price must drop as fast as possible from high 1 to low 2, while the incline from low 2 to high 3 must be as slow as possible. And from high 3, the price must start falling again very fast and confidently, closing the candlestick on the working TF under low 2. As soon as this happens, a bearish Failure Swing is considered complete.
For a bullish Failure Swing to have high potential, the price also needs to grow from point 1 to point 2 as fast as possible, while the decline from point 2 to point 3 must be very smooth. From point 2 to point 3, the price must grow steeply, confidently closing the candlestick above point 2. After this, the bullish Failure Swing is considered complete because the price movement hereafter complies with a classic uptrend.
In most cases, the angles of lines 1-2 and 2-3 will be equal often the trend reverses at line 2-3. However, line 2-3 must never have a sharper angle than line 1-2. And from point 3, the price must always go confidently in the target direction and always at a sharper angle than line 2-3 has.
Signal to buy
The signal appears as soon as you notice a highly potential pattern complete. Enter a buying position as soon as the candlestick closes above the level of point 2. However, if the candlestick closes high above point 2, place a Buy Limit order a bit higher than the broken top because in highly potential Failure Swings, the price seldom drops lower. Example of a signal to buy:
Signal to sell
It appears as soon as the candlestick closes under the level of point 2 of the signal pattern. If the candlestick closes deep under the level of point 2, you can place a Sell Limit order a couple ticks under it or at the level of point 2. Example of a signal to sell:
Stop Loss and Take Profit
Trading by the Failure Swing, the initial Stop Loss should be placed behind point 1. If you are selling, mind the spread. The SL can be moved after newly emerging extremes while the price is approaching the Take Profit. While the trader should not wait long, moving the SL to the breakeven, using each new extreme, when they will trail the position they should always keep in mind that the market will need time to consolidate powers for a new movement.
As for the TP, the trader can do without it, using their position trailing skills. However, trading in Forex or the futures market, I would recommend using a Take Profit. I checked the EUR/USD chart over 14 months for Failure Swings that could be used and decided that on H1 I would not have placed any TP at all if it had to be to times larger than the SL. As for trading Failure Swings on the same pair, M5, over 11 months, I decided that an optimum TP should be no more than 3 sizes of the SL. Alternatively, choose the TP size based on your experience.
However, in the stock market, trailing positions can be more efficient than a stiff TP.
Money management
Trading Failure Swings, the trader can choose between risking fixed percentage of the deposit or risking the same lot. I presume that any trading signal has the same chances for success and failure, that is why I recommend risking fixed percentage of the deposit. It should be no more than 2%, and when you are still learning – no more than 1%.
Example of trading:
I made an in-depth study before writing this article and concluded that trading Failure Swings can bring a profit. However, for this probability to become real, the trader should choose a comfortable TF and be very picky, choosing candidates for profitable signals. Thus they will minimize risks.
By Analytical Department at RoboForex.