Why you should trade Retest instead of Breakout !

There are two ways to trade in any underlying security – either by chasing momentum and perfecting your entry or trading the breakout. Both of them have their challenges poised for traders. However, breakouts are more challenging in nature. Why? Because many times, breakouts are called fakeouts, well, you can avoid them. Just read our blog on how to avoid fake breakouts. Apart from that, you must know that most traders make a fortune when they trade breakouts or put when they trade the retest of a breakout. This blog is all about how you can do the same without fail. 

But first, let’s understand what does retest mean?

What Is A Retest Of Breakout?

We could complicate things for you by using fancy words to help you understand what a breakout and retest are, but we are not those fancy traders. So here’s a simple way to understand this:

To understand a breakout retest, you need to get the hang of what a breakout is. A breakout occurs when the price breaks a resistance of previous days or months high and then proceeds in the breakaway direction. For example, let’s have a look at the daily chart of Bajaj Finserv. We have marked a previous resistance zone. The stock broke the resistance zone with a strong candle, and then it marched on to attain new highs. 

Above, you can see that the price tried to pierce the resistance area twice but failed to do so. At the third attempt, contrary to the previous ones, the price finally managed to break away from the resistance. 

Now that you know how a breakout occurs on charts let’s understand what a retest is.

For a retest to happen, the previous resistance must flip turn into a support zone. But it might be tough to observe a retest on just any time frame; that’s why you have to cover the depth of multi-timeframe analysis. On decreasing the time frame to one hour, we can see a retest happening on the chart. 

Here, we can see that the resistance is flipped and now acts as a support for Bajaj Finserv in 1-hour time frame. 

Now you might be thinking about how to trade breakouts and, in particular, the retest of a breakout.

Here are a few ways you can trade without making losses:

Trading Retest & Breakouts 

Sticking to our concept of simplicity, there is only one way to trade the retest of a breakout – that is, just to wait and watch. 

We tend to follow is to make an entry at the resistance-flipped support and keep a rational stop loss just below that support level because of the manipulative behavior of the stock market to hit the stop losses of various retail traders. 

Try to understand the methodology of trading the retest of a breakout with the simple picture below.

Also, you should look out for certain factors like engulfing candles or pin bars at the resistance-flipped support to make a profitable entry. 

Why only pin bars and engulfing? Because these candlestick patterns show a reversal on price from the ongoing short-term or mid-term trend. 

In some scenarios, if you want to be double sure about the retest-breakout trade that you’re about to execute, volume poses to be an excellent confirmatory agent. Look for unusual growth in volume on the charts. Below, we have an example of Aarti Industries on a daily time frame chart. See how the stock gave a breakout with a pin bar like a candlestick, along with surged volume. 

Thumb Rules For Trading Retest & Breakout 

Whilst we are here to talk about, we also need to know some essential things to make our trading experience hassle-free.  

—   Support & Resistance Are Not Always Pin-point…!!

It’s necessary to understand that support and resistance are not always crystal clear, and beginners should understand the supply and demand zones to understand support and resistance zones. Although, both of them are somewhat the same. If you try to draw a thin trendline for support, then the candle wicks might confuse you. Instead, drawing a zone will help cut down the noise and focus on more precise price action. 

—   Consider Closing & Body Rather Than Manipulative Wicks

While trading the retest of a breakout, making an entry or exit before the candle closes is not considered a wise move. The price is subjected to manipulation, and the long wicks of a candle might confuse traders or investors. That’s why they should always take action on the closing of the candle or broadly see the candle’s body. 

—   Avoid Taking Aid Of Pending Orders

People often use After Market Orders (AMO) or pending orders to enter into a trade by placing these orders around the zone they think is a retest zone. However, the zone might or might not be the retest zone. The price might just come near those zones and continue in the same direction instead of retracing. This, my friends, is what we call a Fake Breakout, and you wouldn’t want to lose your capital to one…!! 

—   Give The Breakout A Window

Many times, it so happens that the breakout doesn’t ever return to the retest zone, and it keeps going in the direction of the breakaway. In those cases, you either need to find other breakout trades or take an entry into the stock, which is equivalent to catching a train that has already left the platform. You can keep your risk in check by using a stop loss. Everybody has a different window for entering a breakout trade on a retest. Usually, wait for the rest of the day for a retest if you spot a breakout on the hourly chart. For the same breakouts in daily charts, you can take the window of a week or two.

Conclusion

Retest provides low-risk entry points for initiating the trade. One should use and construct the whole trading system around it to make consistent profits from it.

Note:  However it’s one of a method I use in my trade systems where I have defined some advance strategies which we share with students to get maximum benefits of core price action with defined active trade management. To learn the entire trading system and strategy we use personally  one check for our mentorship program, check the below link:

https://tradingcafeindia.com/mentorship

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