article is devoted to a special tech analysis pattern in Forex
and the stock market that can be found on a good half of reversals of trend and
correctional movements from M1 to MN. However, right because of this frequent
emergence, the main task of a trader is to distinguish between a Failure Swing
that will bring them a profit with more than 50% probability and a mock Failure
Swing.
Description
and examples of Failure Swing
A
bearish Failure Swing is a double top, the second peak being lower than the
first one. A bullish Failure Swing is a double bottom, the second bottom being
higher than the first one.
Here
are some simple examples:
The
idea of the pattern is that the shorter second part of the pattern demonstrates
such a low market interest to the preceding movement that market players do not
even want to test the tip of the first peak or bottom.
Nonetheless,
classically speaking, an uptrend is considered in action when its highs and
lows increase consecutively; similarly, a downtrend is considered acting when
the lows decrease one after another. However, when a bullish Failure Swing
appears with an increasing instead of decreasing high, this means that the
downtrend is at least slowing down.
And when the price break through point 2
from below, the trend is considered ascending. With a bearish Failure Swing,
the situation is the same: when the bottom point is broken through from above –
the trend is already considered descending. Of course, all this is just
hypothetical, in Forex as well as in the futures or stock markets. Any trading
signal is hypothetical. The trader’s task is to make the probability come true.
Requirements
to a highly probable Failure Swing
For
a Failure Swing to be able not only to slow down the movement in which it has
appeared but also to really push the price in the opposite direction, the
pattern needs time. Particularly – no less than 30% of the time that the
preceding uptrend or downtrend took to develop.
However, the time can work
either on generating force for a reverse movement or banal consolidation for
going in the previous direction. So, a highly potential pattern must demonstrate
changing dynamics of price
movements.
As
for a bearish Failure Swing, the price must drop as fast as possible from high
1 to low 2, while the incline from low 2 to high 3 must be as slow as possible.
And from high 3, the price must start falling again very fast and confidently,
closing the candlestick on the working TF under low 2. As soon as this happens,
a bearish Failure Swing is considered complete.
For
a bullish Failure Swing to have high potential, the price also needs to grow
from point 1 to point 2 as fast as possible, while the decline from point 2 to
point 3 must be very smooth. From point 2 to point 3, the price must grow
steeply, confidently closing the candlestick above point 2. After this, the
bullish Failure Swing is considered complete because the price movement hereafter
complies with a classic uptrend.
In
most cases, the angles of lines 1-2 and 2-3 will be equal often the trend
reverses at line 2-3. However, line 2-3 must never have a sharper angle than
line 1-2. And from point 3, the price must always go confidently in the target
direction and always at a sharper angle than line 2-3 has.
Signal
to buy
The
signal appears as soon as you notice a highly potential pattern complete. Enter
a buying position as soon as the candlestick closes above the level of point 2.
However, if the candlestick closes high above point 2, place a Buy Limit order
a bit higher than the broken top because in highly potential Failure Swings,
the price seldom drops lower. Example of a signal to buy:
Signal
to sell
It
appears as soon as the candlestick closes under the level of point 2 of the
signal pattern. If the candlestick closes deep under the level of point 2, you
can place a Sell Limit order a couple ticks under it or at the level of point
2. Example of a signal to sell:
Stop Loss and
Take Profit
Trading
by the Failure Swing, the initial Stop Loss should be placed behind point 1. If
you are selling, mind the spread. The SL can be moved after newly emerging
extremes while the price is approaching the Take Profit. While the trader
should not wait long, moving the SL to the breakeven, using each new extreme,
when they will trail the position they should always keep in mind that the
market will need time to consolidate powers for a new movement.
As
for the TP, the trader can do without it, using their position trailing skills.
However, trading in Forex or the futures market, I would recommend using a Take
Profit. I checked the EUR/USD chart over 14 months for
Failure Swings that could be used and decided that on H1 I would not have
placed any TP at all if it had to be to times larger than the SL. As for
trading Failure Swings on the same pair, M5, over 11 months, I decided that an
optimum TP should be no more than 3 sizes of the SL. Alternatively, choose the
TP size based on your experience.
However,
in the stock market, trailing positions can be more efficient than a stiff TP.
Money
management
Trading
Failure Swings, the trader can choose between risking fixed percentage of the
deposit or risking the same lot. I presume that any trading signal has the same
chances for success and failure, that is why I recommend risking fixed
percentage of the deposit. It should be no more than 2%, and when you are still
learning – no more than 1%.
Example
of trading:
I
made an in-depth study before writing this article and concluded that trading
Failure Swings can bring a profit. However, for this probability to become
real, the trader should choose a comfortable TF and be very picky, choosing
candidates for profitable signals. Thus they will minimize risks.
By Analytical Department at RoboForex.