Swing Failure Pattern (SFP)

Understanding the Swing Failure Pattern (SFP)

The Swing Failure Pattern, also referred to as SFP, is a reversal pattern commonly utilized by swing traders. It involves placing stop-loss orders above a significant swing low or below a significant swing high to generate sufficient liquidity and drive the price in the opposite direction.

During an uptrend, the price typically forms higher highs and higher lows. However, there comes a point when the price fails to reach a new high, indicating a potential shift in the pattern. Similarly, in a downtrend, the price fails to establish a new low. These failures serve as indications of a Swing Failure Pattern.

To confirm the completion of the pattern, the trendline must break through the previous high in a downtrend or the previous low in an uptrend.

Traders utilize failure swings to determine their entry and exit points. In an upswing, traders take a short position when a failure swing occurs, while in a downtrend, traders go long. Experienced traders often time their entrance to coincide with the creation of the second high before the failure swings in a downtrend.

The Swing Failure Pattern acts as an early warning sign of a trend reversal. Detecting it at an early stage provides traders with an advantage in planning their trades and managing their portfolios.

One example of the Swing Failure Pattern is the RSI failure swing, introduced by J. Welles Wilder in the 1970s. This pattern helps identify changes in price action and momentum by observing the separation between the price and the RSI indicator.

When the price and the RSI indicator diverge, it indicates a lack of trend momentum. An RSI failure swing occurs when the indicator breaches its fail point, confirming a shift in the trend. Traders may wait for a failed swing to appear on the charts to execute more reliable trades.

In a bullish cycle, the market reaches its highest level or overbought limit before declining. It then attempts to rise again but fails to surpass the previous high, forming an ‘M’ shape in the trendline. This failure swing indicates a deterioration in the current uptrend. Conversely, in a bearish market, the second peak fails to reach the lowest low in the oversold region and starts climbing instead.

There are various types of failure swing patterns used in the financial world, including M-shaped and W-shaped failure swings, as well as failure swing top, non-failure swing, failure swing bottom, and non-failure swing bottom. Understanding these swing failure patterns, along with popular technical indicators, will assist traders in making timely entries and exits in stocks, cryptocurrencies, and other major financial markets.