At that phase, the bears took control as there were only bears in the market since the buyers were forced to liquidate. And we are now at point D (figure 1), where a battle takes place most of the time. One of the reasons is that most of the pro-traders, as well as the swing traders, observed that a failure swing was in place and they would like to join the movement.  Thereby, some of them will go short at the current price while others will wait for the price to break below point D – as a confirmation. At this point, bulls would be waiting for much stronger evidence before buying again and shorts would be adding on believing that any blind up would be temporary or fake. But since a huge group of sellers - swing traders and pro-traders – have entered the market, as a result to trap the bulls, this further helped the market to fall below point D. The bears will continue to sell as the market drops. This will result in a sharp move to the downside, below point D, as most of the buyers’ stops were triggered, forcing them out of the market.

It Needs A Lot of Effort But Keep It Simple 

Having explained the structure and the move behind a failure swing, before we go through an example, I would like to address a specific point. It needs a lot  of effort, dedication, hard work, perseverance, self-denial, determination and sacrifice to accomplish or reach a goal; it’s a well-known fact. In our case, we speak about a trading system and some basic rules behind it. Try to simplify things and do not use a plethora of technical tools, such as moving averages, indicators, oscillators, Fibonacci etc. It is very important to remember that each instrument has its own character and it will react differently in certain situations. Besides the process of trying to identify a bull market or a bear market from their early stages, you have to suffer and accept consecutive losses. Trend trading needs discipline and emotional control. If you are not ready to accept these parameters or rules, then you are in danger of losing your money. 

A Perfect Example: EUR/CAD

Let’s look at an example, which was one of my best trades back in mid-2013 to early-2015 period. As each instrument has its own character, it doesn’t mean that if we use a 100-Simple Moving Average (SMA) and a 200-SMA for a trend reversal on the EUR/CAD pair this will also work and on the EUR/USD pair. Note, that this technique will allow us to identify a failure swing pattern in the early stages and to enter the market before the trend develops.

Typically, we will look for a prior trend that has been reversed with the following confirmations:

• First, the market price to cross above the daily 100-SMA and the 200-SMA.

• Second, as a confirmation I will need the 50-SMA to cross above both, the 100-SMA and the 200-SMA.

• Finally, a strict parameter I use is the price to retrace more than 70 percent (76.4 percent Fibonacci Retracement) of the previous trend, which will confirm that it is not a secondary trend or a brief correction. Note, that a secondary trend is a move in the opposite direction of the primary trend that will not continue.

When all of these parameters are met, then I consider that a trend reversal took place and that a new trend is born.

Failure, Swing, Patterns, Trend Following, strategy, Technical Analysis, fx trader, forexFig.2. Trend Reversal - New Born Trend

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