Trading Techniques Using Break and Retest

The Break and Retest trading technique is a popular and effective method used by traders to identify high-probability trading opportunities. This technique is based on the principle that once a key support or resistance level is broken, it often becomes a new point of reference where the price may retrace or “retest” before continuing in the direction of the breakout. This article explores the Break and Retest strategy, its application, and practical tips for utilizing this technique in your trading.

What is Break and Retest?

Break and Retest is a trading pattern that involves three main phases:

1. Break:
   • The price breaks through a significant support or resistance level, indicating a potential change in the market trend or momentum.
2. Retest:
   • After the initial breakout, the price often retraces or pulls back to test the broken level. This retest can provide a confirmation of the breakout and a potential entry point.
3. Continuation:
   • If the price holds above the previous resistance (now support) or below the previous support (now resistance) during the retest, it may continue in the direction of the initial breakout.

How to Identify Break and Retest Opportunities

1. Identify Key Levels:
   • Identify significant support and resistance levels on your chart. These levels are where the price has previously reversed or stalled.
2. Monitor for Breakouts:
   • Watch for a breakout where the price moves decisively through a key support or resistance level. A breakout is typically accompanied by increased volume, indicating strong market interest.
3. Wait for the Retest:
   • After the breakout, wait for the price to pull back and retest the broken level. The retest should show signs of holding, such as small wicks or consolidation around the level.
4. Confirm with Technical Indicators:
   • Use additional technical indicators, such as moving averages or oscillators, to confirm the validity of the retest and the potential for a continuation.

Trading Techniques Using Break and Retest

1. Break and Retest in an Uptrend:
   • Entry Point:
     • Enter a long position when the price breaks above a key resistance level and then retraces to test the same level. Look for signs that the level is holding as new support, such as a small bullish candlestick or a doji.
   • Stop-Loss:
     • Place a stop-loss just below the retested level or below the recent swing low to protect against a false breakout.
   • Take Profit:
     • Set profit targets based on previous resistance levels or use a risk-reward ratio. You may also use trailing stops to lock in profits as the price moves in your favor.
2. Break and Retest in a Downtrend:
   • Entry Point:
     • Enter a short position when the price breaks below a key support level and then retraces to test the same level. Look for signs that the level is holding as new resistance, such as a small bearish candlestick or a shooting star.
   • Stop-Loss:
     • Place a stop-loss just above the retested level or above the recent swing high to protect against a false breakout.
   • Take Profit:
     • Set profit targets based on previous support levels or use a risk-reward ratio. Trailing stops can also be employed to capture extended moves.
3. Break and Retest in Range-Bound Markets:
   • Entry Point:
     • In a range-bound market, use the break and retest technique to trade reversals at the edges of the range. For example, enter a long position when the price breaks above the resistance of the range, retraces to test the broken resistance as support, and shows signs of holding.
   • Stop-Loss:
     • Place a stop-loss just below the range boundary or below the recent swing low for long positions, and above the range boundary or recent swing high for short positions.
   • Take Profit:
     • Set profit targets based on the range boundaries or use a risk-reward ratio to determine exit points.

Examples of Break and Retest Trading

1. Example 1: Break and Retest in an Uptrend:
   • Scenario:
     • The price of the GBP/USD pair has been in an uptrend, approaching a key resistance level at 1.3500. The price breaks above this resistance with a strong bullish candle.
   • Retest:
     • After the breakout, the price pulls back to 1.3500 and forms a small bullish candlestick indicating support.
   • Trade:
     • Enter a long position at 1.3520, place a stop-loss at 1.3470 (below the retested support), and set a take-profit target at 1.3600.
2. Example 2: Break and Retest in a Downtrend:
   • Scenario:
     • The price of the USD/JPY pair has been in a downtrend, breaking below a key support level at 110.00 with increased volume.
   • Retest:
     • The price then retraces to test the 110.00 level and forms a bearish candlestick, suggesting resistance.
   • Trade:
     • Enter a short position at 109.80, place a stop-loss at 110.30 (above the retested resistance), and set a take-profit target at 109.00.

Tips for Trading Break and Retest

1. Confirm the Breakout:
   • Ensure that the breakout is confirmed by a significant price movement and increased volume. A weak breakout with low volume may result in a false signal.
2. Check for Market Conditions:
   • Assess overall market conditions and trends. The Break and Retest technique works best in trending markets and may be less reliable in highly volatile or choppy markets.
3. Use Multiple Time Frames:
   • Analyze the Break and Retest pattern across multiple time frames to confirm signals and gain a clearer perspective of the market trend.
4. Combine with Other Indicators:
   • Use other technical indicators, such as trendlines, moving averages, or RSI, to strengthen the signals provided by the Break and Retest technique.
5. Monitor News and Events:
   • Be aware of economic news and events that may impact price movements and influence the effectiveness of the Break and Retest strategy.

The Break and Retest trading technique is a valuable approach for identifying high-probability trading opportunities by capitalizing on price movements around key support and resistance levels. By understanding the principles of breakouts and retests, and incorporating additional technical analysis tools, traders can enhance their ability to make informed trading decisions and manage risk effectively.

Applying this technique with a disciplined approach and continuous practice can help traders navigate various market conditions and improve their overall trading performance.