Mastering Break And Retest: Catching Big Moves

Are you looking to get ahead in the stock and options markets? Do you want a simple way to take advantage of market movements? Using the break and retest strategy could be exactly what you’re looking for. It’s an effective strategy that can give traders an edge but it requires knowledge about how these types of trades work.

What We Will Cover:

• Break and Retest Definition
• How to Identify Break and Retest Opportunities
• What Is The Difference Between A Retest And A Pullback?
• Breakout and Retest Strategy
• How Do You Trade A Breakout Failure
• Risk Management with Breakouts
• FAQs
  • How do you trade breakout failure?
  • How do traders find retests?
  • Should we wait for retest after breakout?
  • How do you trade breakouts like a pro?
• Conclusion

Break and Retest Definition

Break and retest is a trading strategy used by stock, options, and dividend traders. It involves identifying a price level that has been tested multiple times in the past, then waiting for the price to break through that level before entering a trade. This strategy can be used on any time frame but is commonly used on daily or weekly charts.

The key to the break and retest method of trading is finding an area of support level or resistance where prices have repeatedly failed to move beyond. When this happens, it indicates that there are buyers or sellers who are willing to defend their positions and that creates an opportunity for traders looking to enter a trade in the overall trend direction.

For example, if you were watching a stock chart of HARROW HEALTH (HROW) stock over the last few months you may have noticed that every time it reached a new resistance level of  around $13.00 per share it was met with selling pressure.

After several attempts at breaking through this level HROW succeeded in Dec – Jan 2023.

By recognizing this pattern early, traders with an eye for detail could have taken advantage of the break and retest setup by entering long trades once HROW surpassed $13-15 per share. Placing stop losses just below the prior resistance zone or deeper in the range, is essential to limit potential losses should prices reverse back.

Break and retest patterns are a useful tool for traders to identify potential trading opportunities. In the next section, we’ll discuss how to identify these break and retest opportunities.

How to Identify Break and Retest Opportunities

Identifying break and retest opportunities is an important skill for any trader. By recognizing these levels of support or resistance, traders can take advantage of potential price reversals and enter into profitable trades.

Looking for instruments that made a strong price move and is now consolidating, is one of the best ways to find these setups for a breakout strategy.

Moving averages are also useful when looking for breakout levels since they provide an average price over time which can be used as a reference point when analyzing chart patterns. Finally, simple trend lines can provide zones of opportunity for traders looking to trade the break and retest method.

What Is The Difference Between A Retest And A Pullback?

Retests and pullbacks are two similar but different types of market movements that can occur after a breakout.

A retest occurs when the price of an asset reaches a new high or low, but then quickly reverses back to test its previous level before continuing on with its original trend.

A pullback is when the price moves in the opposite direction from its original trend.

This type of movement can be seen as confirmation that the breakout was valid and not just a one-time event. Retests often provide traders with opportunities to enter positions at better prices than if they had entered immediately after the initial breakout.

Breakouts in the opposite direction can also be the beginning of a new trend and is something to consider if the current direction is showing exhaustion.

Pullbacks are a trading method that also offers traders the opportunity to enter positions, though they should be aware that these entries may come with a higher degree of risk. Pullbacks are often diagonal which can make it difficult to find an acceptable stop loss zone.  These also take on the shape of different price patterns taking place after a strong move in price.

When a large price moves comes in, traders jump into traders fueling the drive.  As price drives up, those in early start taking profit.  Eventually price will reverse as the drive begins to stall due to the selling taking place.   Pullback traders will look to trade the reversal.

When trading breakouts, it is important for traders to understand both retests and pullbacks in order to identify potential opportunities for entering positions at favorable prices.

Risk should be managed appropriately by setting stop losses close enough so that any sudden reversals do not cause large losses, but still far enough to allow for the normal day to day volatility of the instrument.

Breakout and Retest Strategy – Popular Trading Strategy

The breakout and retest strategy is a popular trading technique used by many traders that want confirmation that the break higher (or lower) will hold.

Traders can also use other technical indicators such as moving averages or oscillators like RSI (Relative Strength Index) along with trendlines and chart patterns like triangles or flags to help identify potential breakouts and retests more accurately.

In this example we have:

1. Large move (179%)
2. Price making higher lows under resistance
3. Break and retest of resistance zone

It is important for traders using this strategy to practice risk management techniques such as setting stop losses at sensible levels so they do not get caught up in runaway moves which can quickly turn against them.

Breakout and Retest Strategy is a powerful tool for traders to identify potential entry points in the market. By understanding how to properly execute this strategy, traders can capitalize on price movements and take advantage of opportunities in the markets. Next, we’ll look at how you can trade a breakout failure.

Trading Breakouts That Fail

When you trade the breakout, it’s important to understand how to identify signs of potential failure before entering into any position. One way is by looking at volume levels after the breakout period. If volume fails to pick up significantly after breaking out from its previous range, then chances are high that it could retrace back within its prior range soon after breaking out – thus resulting in a failed breakout trade setup.

While this trade eventually moves up after price played around the break area, this is what we’d not want to see.  No increase of volume after the break, no strong move away from the zone, and the biggest fault is the momentum that propelled the break came from the low of the area.  Look for consolidations near resistance as well as higher lows when looking for a break and retest long.

If you can identify a false breakout in the markets, it is important to manage your risk and position size accordingly. By understanding how to properly manage your risk when trading breakouts, you can be better prepared for success with your next trade.

If wanting to trade failures, you want to see a true reversal candlestick that takes place away from the break zone.  I will cover that in a future trading article.

Risk Management with Breakouts

When trading breakouts, risk management is key. A stop loss order can be used to protect against losses if the breakout fails. This type of order sets a predetermined price at which your position will automatically close in case the market moves against you.

Trailing stops are another tool for managing risk with break and retests as they allow traders to lock in profits while still allowing their positions to remain open if the trend continues.

Position sizing is also important when trading retests since they are more risky than other strategies. Traders should consider using smaller position sizes so that any potential losses do not significantly impact their overall portfolio performance. For example, instead of risking 10% of your capital on a single trade, you could opt for 2-3% instead and spread it across multiple trades or different markets.

It is important to remember that there is no guarantee that any given breakout will be successful; therefore, traders should always exercise caution when entering into these types of trades and ensure they have an exit plan in place before committing capital to a trade.

Traders should avoid chasing after breakouts as this can lead to overtrading and increase exposure to unnecessary risks such as slippage or gaps in prices due to lack of liquidity during volatile times.

FAQs: How to Trade Break and Retest

How do you trade breakout failure?

Breakout failure is a trading strategy used to capitalize on the false breakouts of support and resistance levels. It involves entering a trade in the opposite direction of the breakout when price fails to sustain its move beyond a key level. To successfully trade breakout failures, traders should wait for confirmation that the initial breakout was false before entering their trades.

This can be done by watching for bearish or bullish reversal candlestick patterns such as dojis, pin bars, or engulfing candles. Traders should also place stop losses just above or below the key level depending on which direction they are trading in order to protect against any adverse moves.

How do traders find retests?

Traders can identify retests by studying chart patterns, looking for support and resistance levels, or using technical indicators such as moving averages. Retesting is often used as a way to reduce risk when entering into trades since it allows traders to enter positions with more confidence because price is showing strength. Additionally, it can be used to confirm trends or indicate potential reversals in market direction.

Should we wait for retest after breakout?

It is recommended to wait for a retest after a break. This helps confirm that the price has broken out of its previous range and will continue in the direction of the breakout. A retest also provides an opportunity to enter at a better price, reducing risk and increasing potential reward. If there is no retest, it can be difficult to determine if the breakout was valid or just noise in the market.

There will be times that a new trend leg happens after a breakout without a retest.  You will miss trades at times but there is always another trade around the corner.

How do you trade breakouts like a pro?

Breakouts are a common trading strategy used by both amateur and experienced traders. To trade breakouts like a pro, it is important to identify the right stocks that have strong potential for price movement.  Looking for strong moves and then a consolidation is a good way to do that.

Once identified, you should use technical analysis tools such as support and resistance levels, trend lines, and chart patterns to determine when the breakout may occur. Additionally, be sure to set stop losses in order to protect your capital if the market moves against you. Finally, always remember that timing is key when trading breakouts; make sure you enter at the right time for maximum profit potential.

Conclusion

Trading break and retest is a great way to take advantage of market movements when day trading or swing trading. By understanding the definition of a break and retest, how to identify opportunities, the difference between a retest and pullback, as well as having an effective breakout and retest trading plan in place, you can increase your chances of success when trading stocks or other instruments.

Knowing how to trade a breakout failure helps reduce risk while still providing potential for profit. With all these tools at your disposal you are now ready to start trading breakouts with confidence.