Swing Trading and Market Timing Knowledgebase

By: John Crane, swing trading guru

Reaction Swing Failure

We’ve all heard the old adage about “making lemonade out of lemons”. This also holds true with a failed signal. Turning failure into success can be easy, if you know the “Tells” preceding a swing pattern failure. See Figure # 6.14.

When a futures market makes a run at a new high it can draw many traders into the futures market in anticipation of much higher prices. However, if the buying frenzy cannot sustain itself it can cause a price vacuum that leads to a subsequent collapse. Therein lies the opportunity for the experienced and knowledgeable trader to take advantage of the failed swing pattern and turn failure into success.

There are two different scenarios that lead to a swing pattern failure. The first occurs when the futures market trades above the high pivot—the beginning of the Reaction swing in an upward trending futures market—and closes above the pivot high. The next two price bars are critical. If either of the following two price bars trades below the low of the Breakout bar it is most likely a false breakout and a trap for unaware traders. When traders realize they have been duped, they run for the sidelines and the futures market timing accelerates to the downside.

reaction swing
Figure # 6.14 – Failed Swing patterns

The second set-up occurs when the futures market trades above the pivot high and fails intra-day. In other words, the futures market cannot hold the early gains and closes below the pivot price. This is an early warning of a possible reversal. It is critical for the futures market to recover during the next two price bars and not trade below the pivot low.  Aggressive traders can take advantage of this futures market situation by placing a reversing stop underneath the Reaction swing low and keep it in place until the first three price bars are completed. As I will illustrate in several examples, a failed signal can lead to a significant futures market move in the new direction.

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**THE RISK OF LOSS IN TRADING CAN BE SUBSTANTIAL. YOU SHOULD, THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER-COMPENSATED FOR THE IMPACT IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT.NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES.

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