Trad­ing made sim­ple: the ‘fail­ure swing’

Financial Mirror (Cyprus) - - FRONT PAGE -

Fail­ure swing oc­curs when there is an in­ter­rup­tion of an ex­ist­ing trend and a start of a new trend. It is a strong in­di­ca­tor that the mar­ket will re­verse. As seen in Fig­ure 1, while the mar­ket is in a bullish up­trend con­di­tion there is a fail­ure at point C for the mar­ket to over­come point A to make a new high. After the mar­ket breaks point B at point S then there is an in­di­ca­tion that the mar­ket will re­verse and a short (sell) po­si­tion should be opened. Point C on Fig­ure 1 should al­ways be less than or equal to the top of point A. The op­po­site can be seen in Fig­ure 2 when a fail­ure swing bot­tom fol­lows a bear­ish down­trend. When the mar­ket at point C is not able to in­di­cate a new lower value than the low on point A then a long (buy) po­si­tion sig­nal oc­curs when the B level breaks at point B1.

The way to trade the fail­ure swings is to mea­sure the dis­tance be­tween point A and B and when point B breaks then the trader should try to take profit from the same dis­tance the dif­fer­ence be­tween A and B. The stop loss on the trade should al­ways be a lit­tle above point C (or a lit­tle be­low if it is a bot­tom).

Fig­ure 3 is an ex­am­ple taken from the daily graph of DAX (to­tal re­turn in­dex of 30 ma­jor Ger­man com­pa­nies traded on the Frankfurt Stock Ex­change). The chart shows a real ex­am­ple dur­ing the sum­mer of 2014 of a bullish up­trend fol­lowed by a fail­ure swing and the mar­ket re­versed to a down­trend. At point C (10037) the mar­ket was not able to in­di­cate a new top and at level S (9749) the B point breaks in­di­cat­ing a short po­si­tion. Open­ing a short po­si­tion, the stop loss of the trade should al­ways be a lit­tle above point C as men­tioned which in this case is about 10050. The ‘take profit’ should be at the first TP on the graph at 9451 which is the dif­fer­ence from point A and B. The light blue lines in Fig­ure 3 in­di­cate this dif­fer­ence from point A and B and ev­ery time the mar­ket breaks the line then a short po­si­tion should be opened for a take profit tar­get in the next light blue line. If the risk and re­ward is not enough – since A and C is a dou­ble top and the risk and re­ward ra­tio is 1:1 – then the take profit tar­get could be moved to the next TP level. So, in this case the short po­si­tion should be opened at 9749 and the stop loss to be at 10050. The profit taken should be at the sec­ond light blue line be­cause we want the re­ward ra­tio to be dou­ble the risk at 9153. If this fail­ure swing was traded cor­rectly on this ex­am­ple, a profit of 596 points would have been achieved.

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