Swing Failure Pattern Trading – UPDATED 2022 – A Complete Guide

When you enter the world of trading, learning how to create a winning strategy is one of the most important things.

However, understanding and responding to market indications before others is equally crucial. 

Swing failure pattern is a reliable technical trend indications traders can use to build a winning trading strategy by identifying an early trend reversal. 

In this guide, let us learn more about swing failure pattern trading and its significance in forex trading.  

Swing Failure Pattern Trading – A Complete Guide

As a rule of thumb, traders execute a trade following a trend; they also keep an eye on any early signs of trend reversals to avoid getting on the wrong side of the trend.

The swing failure pattern is an important indication of a trend reversal as it signals when the current market trend weakens and a new trend starts emerging. 

A swing failure occurs when the current price trend fails to reach a new high in an uptrend or meet the lowest low in a downtrend.

Such a pattern helps traders decide when they should enter or exit the market.

They generally enter in a downtrend and exit in an uptrend which means they go against the trend.

Thus, swing failure pattern trading strategy helps take advantage of early trend reversal signals. 

In other words, traders take a short position when a swing failure occurs in the uptrend and plan an entry during a downtrend.

They decide to enter when the second peak is formed before the occurrence of swing failure in the downtrend.

Failure swing pattern gives an early trend reversal signal.

The ability to spot it at an early stage helps you plan your trade-off and benefit your portfolio. 

What Is A Swing Failure Pattern?

A Swing Failure Pattern (SFP) is a kind of reversal pattern in which a trader targets a stop-loss at a point below a swing high or above a swing low in an attempt to push the price in the reverse direction by creating the required liquidity.

Using a swing trading pattern can help identify high-quality areas to trade.

The concept of SFP was first introduced by Welles Wilder Jr. in his book about technical trading analysis.

It is a reliable trend reversal identifier related to the relative strength index. 

When the market is in the uptrend, there are higher highs and lows but a point comes when the price fails to achieve a new high.

Similarly, in a downtrend, sometimes the price doesn’t make a new low.

These are the signs of pattern shift.

For a pattern to complete, the trendline should break through the previous low in the uptrend or the previous high in a downtrend. 

The relative strength index (RSI) swing failure is a great way to understand the SFP trading method.

RSI is a technical indicator that reflects the historical and current positions of an asset relative to the current closing price.

Failure swing pattern occurs when the price line and the RSI line split from one another.

It is an indication of declining momentum, particularly when the market is in an oversold or overbought condition. 

The point where the RSI line is below the recent swing low is referred to as the fail point. Such a pattern triggers a sell signal.

On the other hand, a buying signal is generated when the RSI is above the lowest low point of the current trend.

Swing failure is known to be a strong indicator for a reversal to be used alone for trading decisions. 

Let’s take a look at an example, step by step:

Swing Failure Pattern Trading Example

Swing Failure Pattern Trading Identity

In the image above you can see that there were swing lows and highs generated until an attempted swing high didn’t push high enough, this was identified as the failed swing high.

Swing Failure Pattern Trading Entry

Next, we wait until the swing low that generated before the swing failure pattern as validation through price action. This happened and the entry was validated.

Swing Failure Pattern Trading Take Profit

After taking the trade, you can focus on any way of making a profit, but I like to use market structures as targets.

On the left, you can see the market structure low which was the take profit target reached.

Swing Failure Pattern Trading Example using RSI

Swing Failure Pattern Trading with RSI Analysis

Using the same example, I have overlaid the RSI so you can see how using the RSI as a confirmation bias for a swing failure pattern.

As you can see the failed swing high formed whilst the RSI was decreasing, giving a strong indication the market could reverse.

Swing Failure Pattern Trading with RSI Entry

With the confirmation in place from the RSI, this adds validity to the entry of the break on the swing low prior to the failure pattern.

Swing Failure Pattern Trading with RSI Take Profit

You could use the RSI to gauge an exit opportunity, however, I feel it’s always best to use market structures.

Can you see how easy, yet powerful they are?

Bullish Swing Failure Pattern

A variety of indicators like the MACD, Stochastic Oscillator, and RSI exhibit failure swings.

A failure swing takes place when the indicator is in the oversold or overbought area and indicates the weakening of the current trend and a probability of a reversal. 

A bullish swing failure pattern is created when the indicator goes up to its overbought level or the extreme upper point and slips down only to rise again towards the highest point.

However, it fails to reach that level and turns back to make an ‘M’ pattern. 

Such a failure to create a higher high is termed as a swing failure and is an indication that the bullish trend is on the verge of ending and can reverse any time. 

Bearish Swing Failure Pattern

A bearish swing failure pattern occurs when the indicator goes to the oversold level or its extreme lower point and rises only to go back to the lowest low.

However, it fails to reach the previous low and rises again to form a ‘W’ pattern.

Such a failure to beat the previous low level is termed as a swing failure and denotes that the bearish trend is declining in momentum and the trader should enter a long position. 

Swing failure patterns can be W-shaped, M-shaped, Failure Swing Top or Non-Failure Swing Top.

An understanding of these swing failure patterns along with the common technical indicators helps make the right entry and exit at the right time in the financial landscape. 

Failure Swing Top – When the price goes higher and RSI fails to go higher, falling below the fail point, it is an indication of a short position. 

Non-Failure Swing Top – When the price goes lower and RSI fails to go lower, rising above the fail point, it indicates a long position. 

The two similar situations occurring in the bearish market are known as Failure Swing Bottom and Non-Failure Swing Bottom. 

Final Thoughts

Though not always accurate, the swing failure pattern is a simple and efficient way to identify the weakness in a trend and a potential trend reversal.

Traders can use this pattern to spot entry and exit indications and create a forex trading strategy to achieve greater profits. 


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