Swing Failure Pattern (A Simple Guide)

Why is liquidity important for traders? To fill large buy orders at a suitable price, they need a 1:1 ratio (or as close as possible) between their buy orders and sell orders in the market. It is also important to note that stop losses on long positions are actually sell orders and stop losses for shorts are buy orders. We’ll take a bullish example. Price flips resistance and establishes that as support. Most traders long the asset and place their stop loss below that support (because price losing support would mean bearishness). Breakout traders short as soon as support is lost even before candle closes. Stop loss on longs and short orders are the liquidity injection that large buyers needed to buy, sell pressure is absorbed by large buy orders and the candle closes above support. A ‘sweep’ of the level is seen. Key high/low: Key highs/ lows are points from where a price following a trend reverses or starts ranging. Ex: Price is in an uptrend (higher highs and lows). Forms a high then starts ranging for a month. Ex: Similar pattern, just inverted. The key low is the starting point of the ranging structure. Spotting the Pattern: Spotting the Swing failure Pattern is simple. Bearish example: 1) Price forms a key high or resistance. You can use candle bodies as well as highs. 2) Candle after that tries to move above the high but fails to get above and end up closing below. 3) Confirmation of the pattern is after candle closes. I prefer to wait for confirmation of the ‘sweep’ candle to take the short. Bullish example: 1) Price forms a key low or support. You can use candle bodies as well as wicks. 2) Candles after that try to move below the low but fail to get below and end up closing above. 3) Confirmation of the pattern is after candle closes. I prefer to wait for confirmation of the ‘sweep’ candle to take the long and then add to the position if the low is swept/tested again. Execution: Not every sweep of a high/low is an SFP. Use the notes on liquidity. Ask yourself, where would a retail trader place stops or be baited to take a position. You need to understand how retail trades and go against that. Entry: On close of the candle that sweeps the high/low. 2nd entry (optional): Candle after the sweep closes below/above the high/low as well. SL: Level of the wick of the ‘sweep’ candle. Place order or manual SL on a close above/below the wick. Target: 1) Last swing low/high 2) Range high/low Example 1: Example 2: The second entry might confuse you so let’s start with an already discussed example: The second entry is also valid even if you miss the initial SFP. It provides higher conviction that sellers have no real strength and bids absorbed all orders pushing price below the low. Common Mistakes: Not every low/high has liquidity resting below/above them. As such, SFPs will occur everywhere if you look hard enough. The trick is to practice as much as possible before implementation. Ask yourself all the time, is the setup obvious or are you pushing it? Were there be stops resting below this low? Were breakout traders baited in longing on price moving above this high? Here’s a couple of tips you can follow to increase accuracy when trading SFPs: Read the section on key highs again. Make sure you mark out the right highs. Also, dojis usually signal uncertainty in the market, it’s better to steer clear of them when trading SFPs. Don’t rush your setups. Let Price develop and be as patient as possible. It’s alright to get one trade a week if you have a high success rate. Don’t have a twitchy trigger finger. You need to be calculated and execute at the right moment to be a trader. Use confluence You can use volume, RSI divergences and moving averages for confluence to give you more conviction on the trade.