Have you seen the acronym ‘SFP’ thrown around and have no idea what it is? Regardless of the answer, we are going to so a little bit of a dive into SFP. You should leave this post with an understanding of what they are, why they happen, and how to trade them.
SFP stands for Swing Failure Pattern. And that’s a pretty straight forward naming scheme because they describe times when the price action has made a breakout of a technical analysis pattern and then broke back into the pattern.
I am not going to cover every pattern that these apply to, because that list is limitless. I like to just trade breakouts of ranges so I will use that for my example.
In the first chart of this post I have shown some recent BTC price action where I would be watching a particular range with the mentality of ‘If the range breaks out higher, I’ll long altcoins’. In this chart we can see that the range I would’ve identified did in fact break out higher, but the breakout didn’t hold and it broke back into the range. In other words, the swing outside of the pattern had failed (swing failure pattern). And what immediately resulted was that the price continued to go completely the opposite direction after this SFP.
So the question is, why does this happen? And we will answer that with the chart below.
We have to think like smart money to understand this. Every position whether it’s a long or a short needs the opposite party to be present. In other words, all buyers need a seller and all sellers need a buyer. So what we are seeing here is a failed breakout higher, while all of the breakout traders (myself included) are entering longs, we suddenly become the liquidity for the smart money and market movers to enter shorts.
So this sounds terrible, right? The market movers hand us their bags and we lose money and were looking for the long position. Well that’s not quite it. Many, actually, most traders will continue to hold their longs with the thought “it’ll bounce soon, market is still bullish”. But this is where we are different and how we make the most of this situation. The chart below details this strategy using a chart. I actually really like SFP. It sucks to get trapped in them and take a small loss, but very often when you identify them, the best trades immediately follow because price action will go the other direction pretty significantly. The chart shows how we would identify this, by continuing to watch the range and observing how buyers and sellers are reacting. And once we have confirmed that a SFP has occurred, we close our positions and open them the opposite direction. And this is where we make up those small losses and more.
A couple final thoughts I want to be sure to mention regarding SFP:
You have to just trade the charts when using these. Do not take news or media into account as it will almost always steer you the wrong direction.
If you are ever unsure about an SFP, you don’t have to close a position and open the opposite direction. It’s ok to just close your position and then await more clarity from the market.
The SFP works on every timeframe chart, but a SFP on the 1hr timeframe does not necessarily carry over to the 4hr, 1day, etc timeframes.
These are wildly powerful on a 4-24hr timeframe to identify the tops and bottoms of markets. They don’t tell you exactly when the top or bottom have arrived, but just about every macro cycle top and macro cycle bottom have a swing failure before they reverse. This is a significant portion of my macro trading strategy
Feel free to drop any questions about the topic in comments. Happy trading
Have you seen the acronym ‘SFP’ thrown around and have no idea what it is? Regardless of the answer, we are going to so a little bit of a dive into SFP. You should leave this post with an understanding of what they are, why they happen, and how to trade them.
SFP stands for Swing Failure Pattern. And that’s a pretty straight forward naming scheme because they describe times when the price action has made a breakout of a technical analysis pattern and then broke back into the pattern.
I am not going to cover every pattern that these apply to, because that list is limitless. I like to just trade breakouts of ranges so I will use that for my example.
In the first chart of this post I have shown some recent BTC price action where I would be watching a particular range with the mentality of ‘If the range breaks out higher, I’ll long altcoins’. In this chart we can see that the range I would’ve identified did in fact break out higher, but the breakout didn’t hold and it broke back into the range. In other words, the swing outside of the pattern had failed (swing failure pattern). And what immediately resulted was that the price continued to go completely the opposite direction after this SFP.
So the question is, why does this happen? And we will answer that with the chart below.
We have to think like smart money to understand this. Every position whether it’s a long or a short needs the opposite party to be present. In other words, all buyers need a seller and all sellers need a buyer. So what we are seeing here is a failed breakout higher, while all of the breakout traders (myself included) are entering longs, we suddenly become the liquidity for the smart money and market movers to enter shorts.
So this sounds terrible, right? The market movers hand us their bags and we lose money and were looking for the long position. Well that’s not quite it.
Many, actually, most traders will continue to hold their longs with the thought “it’ll bounce soon, market is still bullish”. But this is where we are different and how we make the most of this situation. The chart below details this strategy using a chart. I actually really like SFP. It sucks to get trapped in them and take a small loss, but very often when you identify them, the best trades immediately follow because price action will go the other direction pretty significantly. The chart shows how we would identify this, by continuing to watch the range and observing how buyers and sellers are reacting. And once we have confirmed that a SFP has occurred, we close our positions and open them the opposite direction. And this is where we make up those small losses and more.
A couple final thoughts I want to be sure to mention regarding SFP:
Feel free to drop any questions about the topic in comments. Happy trading