What is swing failure pattern (SFP)? I’ll tell you shortly!
The term sounded vague to me at first until I gave it some thought.
Sure I know what a swing is and so do you.
But joggle these terms together and you might assume it’s a strange concept.
You’ve seen swing failure patterns on Bitcoin, Ethereum, Matic, Solana, etc. charts and even traded it.
So, what exactly is it and do you really need one more strategy checked off your bucket list?
I’ll let you decide after going through this guide.
You’ll get to know the swing failure pattern definition, how to trade it, and manage risks accordingly.
Ready? Let’s get into it.
Swing Failure Pattern Definition
A trend can be up, down, or sideways correct?
And an uptrend has higher highs and higher lows.
But what happens if there is no new higher high (peak). Do we still have an uptrend?
Don’t be too quick to answer.
The description above paints a perfect picture of what a bearish swing failure pattern is.
It is when price fails to trade above the previous high.
Call the new formation a failed swing high or failure swing and you’d be right.
Those who went long on the preceding high are in pain.
What do you think they’re going to do when they keep on noticing price’s stalled movement close to the previous high?
Hope and pray that it gets to the high so they can close the trade or look for exit routes to cut losses?
The smart traders would take the second option while lucky chaps would hope for the first.
Now recall I’d hinted at a bearish swing pattern failure.
That means there should be an opposite pattern right?
It’s a bullish swing pattern failure.
And this formation is found in downtrends.
Walk with me on this!
Failed Swing Low in Downtrend
A downtrend has lower highs and lower lows.
But price’s inability to create a new low or trough on the next try hints that the swing is failing.
That’s more of a bullish move though.
It gets even better when price creates a higher low.
Check the image below for more clarity.
Now what leads to the creation of this pattern?
Let’s say those who went short at the pullback are aiming for the next lower low to take profit.
But price doesn’t meet their expected target.
Do they keep holding or set a stop above the highs of the consolidation zone?
I’ll like to think they’re doing either of these.
What this does is reduce the selling pressure on the market.
And note that bulls are also stepping in at the same time.
These are probably the swing failure pattern traders or some random guy trading a change in structure.
Here’s what you should take out of this section.
- A swing failure pattern can be found in an uptrend when price makes a double top.
- The formation is found in a downtrend when price makes a double bottom.
- These patterns are early reversal signals.
How to Identify Swing Failure Pattern
Being among the first to spot trend reversals can be very rewarding.
You’d take profit on time since you know the prevailing trend is changing soon,
Accordingly, here are simple ways to identify swing failure pattern and also trade the pattern.
- Look for a change in trend.
- Spot the break in structure.
- Pay attention to candlesticks.
1. Look for a Change in Trend:
The first step to finding a swing failure pattern is to know what the current trend is.
It could be a long-term trend, medium-term, or short-term trend.
Each of these trends can be spotted on the right timeframe.
An investor would eye timeframes like 1D, 1W, 2W, and even M.
A swing trader would check the 1h, 4h, and 1D timeframes.
There’s also the scalper whose timeframe of choice should be between 3m and 15m.
Now that you know the right timeframe based on your trading strategy, it’s time to spot the trend change.
A clue on a change in an uptrend would be hinted by price’s inability to create a new high.
For instance, the Bitcoin/USDT 1-hour chart below can be swing traded.
You’d notice that even though there was a new high, it was only higher than the preceding one by a margin.
Hence, price didn’t travel as far.
Let’s say the length of the impulse move became the same as the corrective move.
Based on the textbook definition of swing failure pattern, the lower high was the first clue to the changing market structure.
And a lower close confirmed it.
On the other hand, a change in a downwards trend would be a non-existent lower low.
So, take your chart to the timeframes outlined above and see if there are any formations of this kind.
The BTC/USDT 1-hour chart below shows a bullish swing failure pattern at play.
Price created a higher low and higher high & close.
2. Spot the Break in Structure:
No, you’re not going to long or take a short because you’ve spotted a higher low or lower high.
That’ll be an aggressive way to trade this pattern with a stop placed above the high or below the low.
Let’s take an uptrend for instance:
A conservative trader would leverage on the break of the higher low to make an entry.
And you may ask, ‘why wait until support is breached when you’ll be missing out on all the action?’
Well, there are cases where price might retest the previous low and it holds as support.
Price could bounce from the level and even breach the previous high which seemed like such a tough feat.
On the other hand, you’re not completely late to the party if you choose the conservative approach.
A lower high and lower low hints at the onset of a downtrend.
Hence, you have a lot of playing field to level off.
That’s because the price objective might be the same length price traveled upwards.
If you choose the conservative way to trade this pattern, you’ll do well to place a stop above the previous high.
How about a change in a downtrend’s structure?
You could be aggressive enough to long from the higher low.
But what happens if price fails to create a higher high as in the BTC/USDT 2-hour chart below.
You’d incur some losses if you’ve not closed the trade or protected your open profit with a stop.
Alternatively, there’s the choice of being conservative enough to wait for a higher high to be created.
An entry could’ve been made after a candle close above the previous high.
But that’s a risky entry since price could create a false breakout.
The second entry could be upon a successful retest of previous support.
Here’s what I’m getting at:
You can trade this pattern by:
Waiting for the full formation of the pattern. And that’s when a lower low (in an uptrend) or higher high (In a downtrend) is formed.
3. Pay Attention to the Candles:
Wicks on higher timeframes would often give signals that price is not ready to go in that direction.
These wicks can be topping tails in an uptrend resulting in candles like doji, shooting star, spinning tops, and tweezer tops.
Lower closes are also a dead giveaway of what’s to come.
Thus, you may have to use multiple timeframe analysis to understand what price may potentially do.
In a downtrend, you’d be watching out for bottoming tails around support.
It could be on a higher timeframe or your current trading timeframe.
It’s important that the length of the candle’s body in relation to its wicks is not a large.
That would only hint bearish momentum is still intact despite the lower wick.
But not to digress, bullish candlesticks at this zone that’ll prove useful include the hammer, tweezer bottom, spinning top, etc.
Check the Bitcoin/USDT 2-hour chart below.
There was a need to go to one timeframe higher just to reduce the noise at the support zone.
A morning doji star has been formed.
The point is, look for wicks and if you have two, three, and more in session, it’s time to take your money and walk or open new positions.
Alternatively, your entry should be made on bullish candlesticks.
Swing Failure Pattern with RSI
The relative strength index (RSI) can be used to spot swing failure pattern.
What most of us know as bullish and bearish divergences, is what takes place here.
But I’ll still break it down.
1. Bearish Swing Failure Pattern with RSI:
It’s a bearish SFP with the RSI when price creates a higher high but the RSI fails to create the same high.
Rather, a lower high is created on the RSI.
This hints that volume is not backing price. Usually, volume should support price’s move.
What’s more, it’s best to spot this signal when the RSI is overbought.
It’s the same way you’d look out for bearish divergences at overbought regions of the indicator.
Drawing a trendline on the price chart and RSI indicator might also prove useful.
Here you want to see when price has breached the trendline on both price and RSI.
2. Bullish Swing Failure Pattern with RSI:
Price may print lower lows while the RSI creates higher lows.
When that happens, it’s a bullish swing failure pattern in place or a bullish divergence.
Unlike the bearish version of this pattern, you’re to look out for this variant on oversold levels of the RSI.
So check the lows or troughs of the RSI and see how its tilt differs from price.
Also, a channel can be drawn on both the price chart and RSI chart.
You’d wait for price to breach the trendline of the channel on both the main chart and RSI before making an entry.
An example of breakouts after failed swings on both price and RSI have been shown below.
Swing Failure Pattern Indicator
There’s a swing failure pattern indicator that makes your work even easier when trading this formation.
This indicator works on all timeframes.
It points out areas where price failed to create a new high or low.
And as such, these are areas you should strategize on how to profit from it.
So, how can you enable the swing pattern indicator?
These are the steps to use:
- Navigate to the indicators section
- Search for ‘Swing failure pattern’
- Several indicators will pop out. Choose one whose trading interface is neat and simple to understand.
I use the PSet Swing Failure Pattern (SFP) Indicator.
And that’s all you need to get started.
The good thing about using this indicator is that over time, your eyes will spot the pattern easily.
Check the Bitcoin/USDT chart below with the indicator enabled.
Although price breached the highs and lows by a margin, the indicator still noted that these were failed swing highs and lows.
That’s because an extended move was note made.
You can also merge PSet with the divergence indicator.
You’ll be able to confirm if the swing failure hinted at by the first indicator is correct.
Here’s what a chart with both indicators look like.
Bullish and bearish divergences hinted at by the RSI coincided with PSet.
Swing Failure Pattern Example
Here are some swing failure pattern examples:
In this Bitcoin/USDT daily chart, price was in an uptrend.
The impulse (upward) moves were longer than the corrective (downward) moves.
However, the last impulse move to the upside had a short length. And it only breached the previous high by a margin.
Some traders would read these two early signals as an impending change in market structure.
On the other hand, the third signal was the failed swing high.
The pattern’s confirmation came when price created a lower low.
These formations finally led to the crypto bear market in 2022.
This example is quite peculiar, unlike the rest in this guide.
Here, price created a lower low even before creating a failed swing high.
A short entry could’ve been made at the stalled movement around that high.
Also, notice how the pattern before the lower high formed a rounded top.
It hinted the region is a distribution zone especially when the length of impulse and corrective moves were almost the same.
What’s interesting to note on the same chart is that there was a lower high without confirmation of a trend change.
The reason lies in the higher low that was created.
Now’s where it’ll really pay to be a conservative trader.
Your cue to finally take a short or become bearish was hinted by the breach in the trend line on the chart and line of the RSI.
The Bitcoin/USDT 15-minute chart below shows a failed swing high followed by the trend line’s breach.
A short entry could’ve been made at the retest of the line. And a stop placed above the previous high.
Frequently Asked Questions
Here are answers to some frequently asked questions.
1. Do Chart Patterns Fail?
Sure, chart patterns can fail once in a while.
These patterns don’t have a 100% guarantee of breaking out in the expected direction or even hitting price objectives.
There could be a swing failure pattern in the case of a rising channel where price fails to visit the next high.
This is often referred to as a partial rise.
It hints bullish momentum is not as powerful as it used to be.
As such, bears could take that as a cue to short sell.
Here’s an ETH/USDT 4-hour chart showing a partial rise to the channel line.
A partial decline is evident on patterns like the falling channel, inverse head & shoulders, Adam and eve double bottoms, etc.
The Ethereum/USDT 4-hour chart below is an example of a partial decline in a falling channel.
2. Do Chart Patterns Work in Crypto?
Yes, chart patterns work in crypto as with several other financial markets.
These formations are reliable to a high degree.
Some traders only work with patterns such as double tops & bottoms, channels, wedges, etc.
You’ll just have to understand that not all patterns have the same potential of playing out in your expected direction.
Let’s take the ascending triangle for instance. It has a 72% chance of breaking out in an upward direction.
A bull flag on the other hand only has a 67% success rate.
There’s also the head & shoulders pattern whose success rate is around 83%.
3. Who Discovered the Swing Failure Pattern:
Welles Wilder Jr. is the name associated with the swing failure pattern.
He wrote the book ‘New Concepts in Technical Trading Systems,’ and revealed clear steps on how to trade the swing failure pattern.
You may do well to check the PDF or audiobook.
Another good book on trading you may come to love is Steve Nison’s Japanese Candlestick Charting Techniques.
You now know what is swing failure pattern and how to trade the formation.
It’s also worth knowing that these patterns occur often.
This means you stand to make good money if you trade them well.
That being said, give it a go.
But first, use a demo account to practice especially if you’re new to trading.
You can then gradually move to small funds on a live account.
Let me know how it turned out using the comment section.
And if you’ve got questions, do well to drop them.