Trading With RSI Part 2: Failure Swings

Relative Strength Index (RSI) failure swings, also known as RSI divergences, are a popular trading signal used by technical analysts to identify potential trend reversals. A failure swing occurs when the RSI fails to confirm a new high or new low in the price, indicating that the trend may be weakening.

There are two types of failure swings: bullish and bearish. A bullish failure swing occurs when the RSI forms a lower low, while the price forms a higher low. This is a sign that the price may be about to reverse higher. Conversely, a bearish failure swing occurs when the RSI forms a higher high, while the price forms a lower high. This is a sign that the price may be about to reverse lower.

To confirm a failure swing, traders can use a trendline to connect the highs or lows on the RSI indicator. If the trendline is broken, it can indicate that the failure swing has been confirmed and that a trend reversal may be underway.

Traders can use failure swings to set entry and exit points for their trades. For example, if a bullish failure swing is confirmed, a trader may enter a long position with a stop-loss order below the recent low. Conversely, if a bearish failure swing is confirmed, a trader may enter a short position with a stop-loss order above the recent high.

It's important to note that while failure swings can be a useful trading signal, they are not always accurate. Traders should always use risk management techniques such as stop-loss orders to minimize their losses.

Traders can also use the RSI to identify failure swings in different timeframes. For example, a trader may use a longer-term RSI to identify failure swings on a daily chart, while using a shorter-term RSI to identify failure swings on an intraday chart.

In addition to failure swings, traders can also use the RSI to identify other trading signals such as divergences and trendline breaks. Divergences occur when the RSI and the price chart move in opposite directions, indicating a potential trend reversal. Trendline breaks occur when the RSI breaks a trendline, indicating a potential change in trend direction.

In summary, RSI failure swings are a popular trading signal used by technical analysts to identify potential trend reversals. Traders can use bullish and bearish failure swings to set entry and exit points for their trades, and can confirm the signals using trendlines. However, traders should always use risk management techniques to minimize their losses, as failure swings are not always accurate.