Understanding SFP In Trading1. What is a Swing Failure Pattern (SFP)?
A Swing Failure Pattern (SFP) occurs when the price temporarily breaks a key swing high or low but fails to continue in that direction, leading to a sharp reversal.
This pattern is often driven by liquidity grabs, where price manipulates traders into taking positions before reversing against them.
An SFP typically consists of:
A false breakout beyond a previous swing high/low.
A sharp rejection back within the prior range.
A liquidity grab, triggering stop-loss orders and fueling a reversal.
SFPs provide powerful trade opportunities, signaling potential reversals and the exhaustion of trends.
2. Understanding Liquidity Grabs & Stop Hunts
The financial markets are structured around liquidity. Large institutions and algorithmic traders require liquidity to execute their large orders efficiently.
One way they achieve this is by triggering liquidity grabs and stop hunts.
Liquidity Grab:
Occurs when price moves beyond a key level (e.g., swing high/low), activating orders from breakout traders and stop-losses of trapped traders.
Smart money absorbs this liquidity before pushing the price in the opposite direction.
Stop Hunt:
A deliberate price movement designed to trigger stop-loss orders of retail traders before reversing.
Often seen near major support and resistance levels.
These events are crucial for understanding SFPs because they explain why false breakouts occur before significant reversals.
3. Why Smart Money Uses SFPs
Institutions, market makers, and algorithmic traders use SFPs to:
Fill large orders: By grabbing liquidity at key levels, they ensure they can enter large positions without causing excessive price slippage.
Manipulate retail traders: Many retail traders place stop-losses at obvious swing points. Smart money exploits this by pushing the price beyond these levels before reversing.
Create optimal trade entries: SFPs often align with high-probability reversal zones, allowing smart money to enter positions at better prices.
Understanding how institutions operate gives traders an edge in identifying manipulative moves before major price reversals.
4. Market Structure & SFPs
Market structure is built upon a series of swing highs and swing lows. Identifying these key points is crucial because they represent areas where liquidity accumulates and where price is likely to react.
Swing High (SH): A peak where price makes a temporary high before reversing downward.
Swing Low (SL): A trough where price makes a temporary low before reversing upward.
Types of Swing Points in Market Structure
Higher Highs (HH) & Higher Lows (HL) – Bullish Trend
Lower Highs (LH) & Lower Lows (LL) – Bearish Trend
Equal Highs & Equal Lows – Range-Bound Market
5. Liquidity Pools: Where Traders Get Trapped
Liquidity pools refer to areas where traders' stop-loss orders, pending orders, and breakout entries accumulate. Smart money uses these liquidity zones to execute large orders.
Common Liquidity Pool Zones:
Above swing highs: Retail traders place breakout buy orders and stop-losses here.
Below swing lows: Stop-losses of long positions and breakout sell orders accumulate.
Trendline & Range Liquidity:
Multiple touches of a trendline encourage traders to enter positions based on trendline support/resistance.
Smart money may engineer a fake breakout before reversing price.
6. Identifying Bullish SFPs
SFPs can occur in both bullish and bearish market conditions. The key is to identify when a liquidity grab has occurred and whether the rejection is strong enough to confirm a reversal.
Bullish SFP (Swing Low Failure in a Downtrend)
Price sweeps a key low, triggering stop-losses of long traders.
A strong rejection wick forms, pushing price back above the previous low.
A shift in order flow (bullish market structure) confirms a potential reversal.
Traders look for bullish confirmation, such as a higher low forming after the SFP.
Best bullish SFP setups occur:
At strong support levels
Below previous swing lows with high liquidity
After a liquidity grab with momentum confirmation
7. Identifying Bearish SFPs
Bearish SFP (Swing High Failure in an Uptrend)
Price takes out a key high, triggering stop-losses of short traders.
A sharp rejection forms, pushing the price back below the previous high.
A bearish shift in order flow confirms downside continuation.
Traders look for bearish confirmation, such as a lower high forming after the SFP.
Best bearish SFP setups occur:
At strong resistance levels
Above previous swing highs where liquidity is concentrated
With clear rejection wicks and momentum shift
8. How SFPs Signal Reversals
SFPs provide early warning signs of trend reversals because they expose areas where liquidity has been exhausted.
Once liquidity is taken and the price fails to continue in that direction, it often results in a strong reversal.
Key Signs of a Strong SFP Reversal
Long wick rejection (indicating absorption of liquidity).
Close back inside the previous range (invalidating the breakout).
Increased volume on the rejection candle (confirming institutional activity).
Break of short-term market structure (trend shifting).
Divergences with indicators (e.g., RSI divergence at the SFP).
9. Identifying High-Probability SFPs
One of the most critical aspects of a valid SFP is how the price reacts after a liquidity grab. The candle’s wick and close determine whether an SFP is strong or weak.
A. Wick Rejections & Candle Closes
Key Features of a Strong SFP Wick Rejection
Long wick beyond a key swing high/low (indicating a liquidity grab).
Candle closes back inside the previous range (invalidating the breakout).
Engulfing or pin bar-like structure (showing aggressive rejection).
Minimal body size relative to wick length (e.g., wick is 2–3x the body).
Bullish SFP (Swing Low Failure)
Price sweeps below a key low, triggering stop-losses of buyers.
A long wick forms below the low, but the candle closes back above the level.
This signals that smart money absorbed liquidity and rejected lower prices.
Best bullish SFPs occur at major support zones, previous swing lows, or untested demand areas.
Bearish SFP (Swing High Failure)
Price sweeps above a key high, triggering stop-losses of short sellers.
A long wick forms above the high, but the candle closes back inside the range.
This signals that smart money absorbed liquidity and rejected higher prices.
Best bearish SFPs occur at resistance levels, previous swing highs, or untested supply areas.
❌ Weak SFPs (Avoid These)
❌ Wick is too small, meaning the liquidity grab wasn’t significant.
❌ Candle closes above the swing high (for a bearish SFP) or below the swing low (for a bullish SFP).
❌ Lack of strong momentum after rejection.
B. Volume Confirmation in SFPs
Volume plays a crucial role in validating an SFP. Institutional traders execute large orders during liquidity grabs, which often results in spikes in trading volume.
How to Use Volume for SFP Confirmation
High volume on the rejection wick → Indicates smart money absorption.
Low volume on the breakout move → Suggests a lack of real buying/selling pressure.
Increasing volume after rejection → Confirms a strong reversal.
Spotting Fake SFPs Using Volume
If volume is high on the breakout but low on the rejection wick, the move may continue trending rather than reversing.
If volume remains low overall, it suggests weak market participation and a higher chance of chop or consolidation instead of a clean reversal.
Best tools for volume analysis:
Volume Profile (VPVR)
Relative Volume (RVOL)
Footprint Charts
10. Key Takeaways
SFPs are Liquidity Grabs – Price temporarily breaks a key high/low, triggers stop losses, and then reverses, signaling smart money absorption.
Wick Rejection & Close Matter – A strong SFP has a long wick beyond a swing point but closes back inside the range, invalidating the breakout.
Volume Confirms Validity – High volume on rejection wicks indicates smart money involvement, while low-volume breakouts often fail.
Higher Timeframes = Stronger SFPs – 1H, 4H, and Daily SFPs are more reliable than lower timeframe setups, reducing false signals.
Confluence Increases Probability – SFPs are most effective when aligned with order blocks, imbalances (FVGs), and major liquidity zones.
Optimal Entry Methods Vary – Aggressive entries capitalize on immediate rejection, while confirmation and retracement entries improve accuracy.
Proper Stop Loss Placement Prevents Fakeouts – Placing SL just beyond the rejection wick or using structure-based stops reduces premature exits.
Take Profit at Key Liquidity Levels – Secure profits at previous swing highs/lows, order blocks, or imbalance zones to maximize returns.
