What Are Failure Swings & How To Trade Them

Failure Swings

In his book, J. Welles Wilder, New Concepts in Technical Trading Systems describes strong market reversals. He used the RSI (relative strength index) to measure these swings. He then gave these sharp price movement names of failure swings.

There are plenty of indicators like the MACD, CCI, RSI, and the Stochastics that are plotted separately on the chart. They all give failure swings. However, almost all technical indicators show failure swings in one form or the other.

What are Failure Swings?

According to J. Welles, failure swings mostly occur in momentum oscillators because they show price movements in a specific range (mostly 0 to 100). Due to this, they give overbought and oversold conditions. These conditions are the signs of a weak or strong trend in the future.

For instance, in an uptrend, most momentum indicators reach overbought levels and present that the price reversal is about to happen. However, when the indicator does not reach that level, it creates an M pattern and does not create higher highs. This, according to the author, is a failure swing.

Conversely, in a downtrend, the momentum indicators reach their oversold level and signify a market reversal. But, when they fail to reach that level, or the market doesn’t reverse, it makes a W pattern, and it’s a failure swing.

Bullish and Bearish Failure Swings
Bullish and Bearish Failure Swings

To identify failure swings, traders must remember a few points:

  • The price must break through the previous period high in a downtrend or last period low in an uptrend for the pattern to be completed.
  • Point A is the last low point in a downtrend or the previous high point in an uptrend.
  • Point B is the first high or low point of the current trend.
  • Point Cis higher low than Point A in a downtrend or a lower high in an uptrend.

How to use Failure Swings?

Traders usually use failure swings as a part of a reversal strategy. When there is an uptrend, a trader could confirm the failure swings and enter short positions in anticipation of a trend reversal. On the other hand, a trader could confirm the failure swings and take long positions when there is a downtrend.

The entry points occur when there is a recent trough in an uptrend. Traders can then take positions at this trough with stop-losses near the recent low. Contrarily, in a downtrend, entry points appear when there is a recent peak. Traders could take positions at this peak with stop-losses near its recent high.

Failure swings can also pinpoint exit points. When in an uptrend, a trader may choose to exit the trade on low, and in a downtrend, a trader may decide to exit the trade on high.

Failure Swings trading strategy

As failure swings occur in almost every indicator, traders can take advantage of making them part of their trading strategy. It can be used on every timeframe, so both long-term and short-term traders can benefit from them.

Failure Swings buy strategy

  • Look for the failure swings in a downtrend.
  • Wait for the price bar to go bullish before entering.
  • Enter the trade at the recent trough.
  • Place a stop-loss near the recent low.
  • Exit the trade on high.

Failure Swings sell strategy

  • Look for the failure swings in an uptrend.
  • Wait for the price bar to go bearish before entering.
  • Enter the trade at the recent peak.
  • Place a stop-loss near the recent high.
  • Exit the trade on low.

Failure Swings conclusion

Failure swings are a part of trading. They can be seen as reversals, but they mostly emerge when the momentum indicators are in use. To fully utilize failure swings, traders can combine them with other forms of technical analysis.

Failure Swings can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of market analysis such as Failure Swings on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.

Failure Swings are just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing Failure Swings into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with Failure Swings, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!