J. Welles Wilder Jr., the person who introduced RSI to the world through his seminal book, New Concepts in Technical Trading System, also described a setup that according to him is the most powerful signal that RSI generated.
It has been more than four and half decades since the book was launched and traders seem to have forgotten this powerful set up. While the setups like divergences and oversold/overbought RSI levels are the talk of the town, the more powerful setup with proven better success rate seems to have vanished from traders toolkit.
The setup I am talking about is RSI failure swings.
Let's learn about this in detail in this post.
What is an RSI failure swing?
A failure swing happens when RSI makes a higher low or a lower high after moving in oversold/ overbought zone respectively.
The RSI move is exactly like a divergence, however, the move is independent of price action. That is while looking for failure swings you don't look at price pane at all.
A RSI failure swing has two variations.
The top RSI failure swing-
This variation of failure swing occurs at the market tops, as the name suggests. In this failure swing, RSI after surging above 70 makes a lower high and afterwards dips below the low between these two highs. This is a bearish signal. This suggests the market has topped out and now poised for a down move.
Let's see this in an image below.
The bottom RSI failure swing-
This variation of RSI failure swing forms at market bottoms when RSI after plummeting into oversold territory (<30) makes a higher low and afterwards breaks above the peak between the two lows. This is a bullish signal and suggests the bearish momentum has faded and the price is set to move upwards.
Let's see this in an image below.
Now looking at these RSI patterns you might argue that these patterns are ditto like RSI divergence. However, these two patterns are different. We will look at the differences between the two in the following section.
Difference between RSI divergence and RSI failure swing-
While the two RSI patterns look similar, however, there are couple of differences between the two.
1) RSI divergence compares the price movement with RSI. While marking divergences on a chart you will look for instances when the two has moved in opposite directions, like price making a new low while RSI makes a higher low and vice versa.
But RSI failure swings are independent of price action. You don't look at price action while marking RSI failure swings.
2) Once a divergence is formed (RSI making higher low and price making lower low and vice versa), the pattern is considered complete. There is no confirmatory move.
But failure swing has a confirmatory move. RSI after making a higher low has to zoom above the peak between the lows to confirm the pattern.
How to trade RSI failure swings?
Now that we know how to identify the failure swings, let's delve into the practical uses of failure swings in trading.
The simplest way to trade the failure swings is to take entry as soon as the pattern has formed.
For example, in a bullish setup, you take entry once the RSI crosses the highest point between the lows that formed the failure swing and in a bearish setup, you take a short entry the moment RSI crosses below the lowest point between the highs that formed the failure swing. This is shown in the chart below.
This method is simple and straightforward, however, by the time RSI confirms a buy/sell after a failure swing, the price frequently moves a long way, forcing you to place wider stop-loss.
To address this issue, some analyst suggest another entry method. In this method, you wait for RSI to retrace after breakout and enter once it has retraced to the breakout level. This allows you to take a confirmed trade while allowing you to put a narrower stop-loss. This has been shown in the pic below.
The Wilder's method of trading RSI failure swings-
Wilder described a peculiar way to trade the failure swings. He advised drawing trendlines on the RSI itself. Wilder argued that momentum often breaks its trendline before price breaks its trendline.
Wilder proscribed to enter a trade after a RSI swing has formed and RSI line breaks its own swing high/low and trendline both.
Another way to trade RSI failure swing is to look for entry points near key levels like a major support or resistance level and look for signals like a candlestick patterns, MACD buy signals or MA crossovers at such levels.This has better success rates.
How reliable is RSI failure swing?
The Bottom line-
RSI failure swings are one of the most underused yet powerful signals described by J. Welles Wilder himself. Unlike divergences or simple overbought–oversold readings, failure swings focus purely on momentum behavior and include a built-in confirmation, making them more objective and reliable.
When used correctly—especially near key support or resistance levels and in non-strongly trending markets—they can help traders spot high-probability reversals with favorable risk–reward setups.
While no indicator works all the time, RSI failure swings deserve a permanent place in a trader’s toolkit as a disciplined way to identify fading momentum and potential trend reversals.
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