A swing failure pattern (SFP) is a technical analysis indicator used to identify potential reversals in the trend of a financial asset, such as a stock, commodity, or cryptocurrency.

It is based on the concept that a strong trend will only break a significant swing point with a significant retracement.

Characteristics of Swing Failure Patterns

1. Trend Reversal Indication

SFPs signal a potential reversal in the current trend, suggesting that the price may move in the opposite direction.

2. Swing Point Violation

An SFP occurs when the price breaks a significant swing point but fails to continue in the same direction.

3. Trend Continuation Probability

SFPs do not guarantee a trend reversal but increase the probability of a change in direction.

Types of Swing Failure Patterns

1. Bullish SFP

A bullish SFP occurs when the price breaks a swing low and then fails to make a lower low, indicating a potential upward trend reversal.

2. Bearish SFP

A bearish SFP occurs when the price breaks a swing high and fails to make a higher high, indicating a potential downward trend reversal.

How to Identify Swing Failure Patterns

1. Identify Swing Points

Swing points are the highs and lows of a price trend.

Significant swing points are those that have yet to be recently broken.

2. Track Price Movement

Monitor the price movement after breaking a swing point.

If the price fails to continue in the same direction, it may form an SFP.

3. Confirmation

Additional indicators often confirm SFPs, such as volume, momentum, or moving averages.

Trading with Swing Failure Patterns

1. Potential Entry Point

SFPs can be used as potential entry points for trades in the direction of the potential trend reversal.

2. Stop-Loss Orders

Traders should place stop-loss orders below or above the swing point to limit potential losses if the SFP does not materialize.

2. Risk Management

SFPs should be used with other risk management strategies, such as position sizing and diversification.

Wrapping up, swing failure patterns are a valuable tool for technical analysis, providing insights into potential trend reversals.

While they do not guarantee a change in direction, they can help traders identify potential trading opportunities and make informed decisions based on technical indicators.