Serial Indicator: Failure Swings
Failure Swings is a term originally coined by J. Welles Wilder and used in his book, New Concepts in Technical Trading Systems, to refer to “a strong indication of market reversal”. Wilder uses it to confirm sell and buy signals generated by his RSI. A number of indicators are usually plotted in separate places with price charts and in particular the range-bound indicators, such as RSI and the Stochastic Oscillator, may indicate failure swings.
Failure swings can occur when the indicator is in overbought or oversold territory and indicates that the current trend is weakening and a trend reversal is very likely.
As an illustration, when the trend rises or bullish, the indicator reaches overbought or upper extremity level and retrace lower to then rebound to the extreme again. However, the indicator fails to reach the same level as before and goes back down again, making the M. pattern. The failure to make higher highs is failure swings. The appearance of the upper failure swings indicates that the ascending trend is approaching the end (the strength of the weakening trend) and may soon reverse the situation.
Conversely, when the trend is down or bearish, the indicator reaches oversold level or lower extremity and rebounds only for retrace to extremes again. However, the indicator fails to reach the same level as before and again rises again, creating a W pattern. Failure to make lower lows is failure swings. The occurrence of the lower failure swings indicates that the descending trend is approaching the end (the strength of the weakening trend) and can immediately reverse the situation.
Failure swings can coincide with positive or negative divergences between indicators and price action, although divergence is not a prerequisite for failure swings.
Failure swings can be used to open positions in anticipation of a trend reversal. In other words, the position is taken against the direction of the current trend. The entry level is indicated when there is a downward swing by the indicator before the failure swings in the ascending trend, or the peak formed before the failure swings in the descending trend.