SWING FAILURE PATTERNHello, fellow forex traders! Today we will talk about one of the most powerful Price Action setups, which is little known to the public. The Swing Failure Pattern(SFP)is a false-break of the maximum or the minimum level of the previous swing. The UK trader Tom Dante is mostly responsible for spreading this pattern. The effectiveness of SFP is such that after mastering the skills of identifying of this pattern many traders use it as a full-fledged trading system.
✴️ How and why is this SFP formed?
SFP occurs as a result of a failed attempt by market participants to form a new swing high or swing low. The failure is due to the desire of a pool of large traders or investors to take advantage of the accumulation of liquidity of pending breakout orders (Buy Stop, Sell Stop) and loss limit orders (Stop-loss) to enter the position.
The placing of a large number and large volume of pending orders in a relatively narrow price range leads to a swing, very similar to the classic trend. Traders are attracted by a "clean" move up or down and place orders virtually in one spot, just above the highs or lows, hoping that the trend will continue.
The described example in the growing trend is shown in the picture above. The evident upward movement of the currency pair leads to the desire to enter the market and place the order immediately after the nearest maximum. Stops of the traders who are in a counter-trend position will also be placed there, as it is obvious to them now.
✴️ The SFP pattern: The rules for the formation and entry points
SFP is formed on a swing high or a swing low of any timeframe, but the most preferable timeframes for its search are those starting from H1 and above. A false breakout is always preceded by a clear correction, leaving a "clear space" to the right of the previous maximum or minimum.
When looking for the SFP pattern, the main condition for its formation must be the evident trend and correction, as well as the breakout of the previous swing level (high or low). If there are several extreme levels, the pattern candlestick should ideally break all previous values, or at least the nearest extreme. The picture below shows the formation of low on the correction of a rising trend. The candlestick of the SFP-pattern should break of the swing low.
As in the first case considered, the entry in the pattern is made at the opening price of the next candle, the SFP candle itself can be of any configuration, shape and size, you should only pay attention to the mandatory high/low and the closing of the candle body above/below the extreme.
✴️ Stop Loss and Take Profit levels for the SFP pattern
The strategy is best utilized with a dynamic stop loss, the size of which can be determined using the ATR indicator, which measures the current volatility at the period specified by the trader.
If the trader is looking for a pattern on the hourly chart, then a stop loss should be set by the size of the daily volatility. Change the period of the ATR indicator to 24. On the daily timeframe you can leave the standard value of 14. Or set it to 20 (the average number of working days in a month). The pattern is not designed for a long-term or medium-term trading, the task of the trader is to catch the pullback. Set a take profit just below the nearest high or above the low, at the nearest level.
✴️ Key Features
The pattern can be detected on any time frame, but traders should look for SFPs starting with hourly candles. The liquidity of pending orders and stops, which attracts large players, is the key to the successful working out of the false breakout, which simply may not be present on small timeframes.
For the same reason, the visibility of a pullback from the swing-high and swing-low for all traders is important, you should not look for a pattern in the flat market, on the minimums and maximums of which there will not be the necessary number of pending orders.
When multiple lows are accumulated in a row (double, triple bottoms or tops), the SFP candlestick should ideally use its tail to break all previous extremes, but the closing price should be lower than the maximum (higher than the minimum).
The shape of the candle can be anything, it will often be similar to a pin bar, it's allowed to retest, if it occurs in the next working intervals (timeframes, chosen by the trader).
✴️ Conclusion
False breakout often leads to missed profits and an additional stop loss. The SFP pattern demonstrates how you can profit from it with high probability. The figure shows that traders should pay attention to it.
