What and How Forex Failure Swings?
A number of indicators plotted on the charts have their own space rather than on the price charts, such as the MACD, and especially the range-bound indicators, such as RSI and the Stochastic Oscillator. The last two indicators can show Failure Swings (failure price swings). The term was originally coined by J. Welles Wilder in his book, New Concepts in Technical Trading Systems. The purpose of detecting these failure swings is to look for strong indications of a reversal. Wilder uses it to confirm sell and buy signals generated by his RSI. Failure swings can also be applied to indicators other than RSI.
Failure swings can occur when the indicator is in the overbought or oversold region and indicates that the current trend is weakening. So that trend reversal is very possible. In an uptrend or bullish trend, the indicator reaches the overbought level or the extreme high level and the retrace is lower only to rebound to the extreme again. However, the indicator fails to reach the same level as before and descends again, making the pattern M. The failure to create a higher height is the failure of the swings. This indicates that the ascending trend is nearing the end and there may soon be a reversal in direction.
Conversely, in a downtrend or bearish trend, the indicator reaches an oversold level or a low level of extreme and rebounds higher only to retrace downwards to the previous extreme low. However, the indicator fails to reach the previous lower extremity level and rises again, creating a W pattern. Failure to reach the previous low extremity level is failure swings and indicates that the downward trend is out of momentum and immediate reversal.
Failure swings can occur alongside positive or negative divergences between indicators and price action, although divergence is not a prerequisite for failure swings.
Detecting failure swings can be used to find entry levels in anticipation of a trend reversal. In other words, the position is taken against the current trend. The entry point is marked during the swing low on the indicator that appears just before the failure swing in the uptrend or the swing high that formed just before the failure swing in the descending trend. In an uptrend, find a sell position and in a downtrend, find a buy position. These levels can also be used to exit the position if you have long been in an up or down trend in a downtrend.