The Failure Swing Trading Pattern – What is It and How to Use it

Bullish Failure Swing

 

The failure swing trading pattern is not 100% bulletproof, but it can have a high enough accuracy to make it one of the simplest and most effective systems to trade. Many estimate an accuracy of 70% which can be achievable depending on the conditions and combinations with other tools as well as the nature of the market of interest.

Let’s go through.

 

1. Description of the failure swing.


Bearish Failure Swing Pattern

Simply put the failure swing is the failure of the market to make a subsequent low after a previous low in a bear or ranging market or a subsequent high after a previous high in a bull market or ranging market. Moreover, for the pattern to be completed, the market must break through the previous high in a downtrend or previous low in an uptrend or ranging market.

Point A is the last low point in downtrend or the last high point in an uptrend.

Point B is the first high or low correcting the prevailing trend.

Point C is a higher low than Point A in a downtrend or a lower high in an uptrend.

 

2. Entering the Trade with Failure Swings.


Bullish Failure Swing Trade

Entering the trade is really easy. All you need to see is the market making a close past point B. Sometimes the market moves very quickly, and the best entry opportunity might be missed. However, it’s better to miss these opportunities as they turn to be short-lived without many profits and end up being a short-term corrective move than a trend reversal.

Some prefer to enter earlier, before the majority of the traders joins in at the same time only to cause a huge jump on the price. I on the other hand prefer to wait for the completion of the pattern to trade what I see and not what I wish to see. I know when I see a failure swing pattern once it is completed. It’s always preferable to avoid second guessing whether it’s going to be a failure swing pattern or not before its already complete. Experience had told me this and besides trading can become very stressful if it’s based on guessing and wishing. Once you see the evidence there is no doubt.

 

3. Exiting the Trade.


Failure Swing Trade Exit

The exit can be up to your preferences and unlike entry, exit is more difficult and depends on your preferences. Depending on the nature of the trend I prefer to use what will give me a good combination of profits while letting the market breath and avoid getting stopped too early or leave too much profit on the table.

Moreover, as I love to combine Elliot wave analysis in my trading, I utilized Fibonacci extensions that are part of Elliot wave theory. These extensions give me a sense as to where the following waves triggered by the first failure swing can possibly terminate. The software I use makes it easy for me to plot a possible wave combination and then add the most probable Fibonacci extension for this wave.

Another wave to anticipate possible exit points, especially in smaller time frames like the 4h or 1h charts are support and resistance (S/R) levels. May times a move will stall a bit and continue or reverse at these levels. Depending on the overall market state and your analysis you can take home early profits and trail you stop loss accordingly at the most important S/R levels.

 

4. Failure Swing Pattern Enhancements.


 

The Failure Swing Pattern has a high level of accuracy but like all patterns under certain conditions its accuracy can be higher or lower depending on the case.

Elliot Wave – My preferred method for enchasing the pattern return is to combine it with Elliot wave analysis. There is nothing better to spot a failure swing pattern at the beginning of a larger five wave move, with potentially lucrative returns ahead. The downside of this is that Elliot wave is a much more complicated subject that the failure swing pattern and it can increase the complexity of your trading system or create paralysis by analysis. I like to keep it simple so I often just go for it if the pattern looks and feels right.

RSI – The combination of the failure swing pattern with the RSI is a perfect combination in cases you want to make counter trend trades or peak tops and bottoms.

Moving Averages – I like using the failure swing systems with moving averages for two reasons:

#1 Trend Direction– Moving averages help me understand the direction of the main trend easily

#2 Timing the Exit – Faster moving averages or lower timeframe moving averages help me manage my exit more efficiently than many other indicators

 

Final Thoughts.


Final Thoughts

The failure swing trading pattern can be the basis of you trading system or an additional confirmation that you are on the right side of the market.

In any case its usefulness is significant, as it’s the easiest way to tell the path of less resistance for the market you are trading. However, caution is needed to assess the market phase and timeframe correctly as failure swings within corrective moves can be misleading and indicate the wrong direction.

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