The Breakout Retest Guide
This is one of those subjects that is vital to learn for most traders. It can save you a lot of hassle by learning what a retest actually is & why you should employ this strategy at times.
The term 'breakout retest' or sometimes called 'confirmation' can be ambiguous, so I will seek to clear it up here.
When playing in a market, it can be of great insurance not to be the first man to enter. This is because sometimes, when a trend is moving in a particular direction, it has not 'proved' yet that this direction can be supported. Often it will clear a level only to reverse. Often it will fakeout. In-fact with the majority players being long bias by nature, the market dictates that a large proportion of breakouts will fail in my opinion.
So, whilst jumping the gun may seem tempting and entering a little early, waiting for something we call 'confirmation of a test level' or 'retest' is your insurance that you don't buy a top. It also helps you exhibit the idea of 'patience' or 'let the trade come to me'. A formidable and underestimated skill in the trading world.
1. Wait for an asset to break out past resistance
2. Wait for an asset to retest this now new support
3. Once support is confirmed, buy
4. One may place bids at support, or on a re-break on a lower time-frame after the bounce
The main question is usually 'How do we confirm support?'. Okay!
Let's look at a few examples:
Below Are 3 graphics As Examples:
The above chart is the 2HR chart displaying a retest play
Point 1: Shows that we break a resistance zone. Resistance is represented by the black line. The zone highlighted in blue shows the initial break.
At this point you may be wondering 'Do I fomo in a buy?!?! What to do??'
Well. If you are not clear (for example it is not 'major break' or it is not an asset which you are almost sure will not stop) then waiting for a retest is favourable.
Point 2: So...you wait for price to retest the breakout point to see if buyers are 'true'
Point 3: Support seems to be there, which suggests entry to be okay
But This Is Hindsight, No? How do we tell in the moment?
Well..If you are trying to assess whether a retest is successful, it is best to 'zoom in'. By zooming in, we can get a clearer picture of what is happening on the retest. This is important for assessing in real-time. Zooming in means going in on a lower time-frame to see a closer up version of what the larger time-frame is showing.
And before we continue: Never ever think that a retest must be successful. Your job is just to get a good entry point on a higher probability trade. That is what it is used for. Letting the game come to you. It is not a guaranteed ticket to financial freedom. More on what high probability in these scenario's mean later..
In any-case...Below displays figure two. This is a zoomed in scenario of the figure 1
Here we can clearly see that we are forming a descending triangle into the previous resistance zone, now turned support. This highlighted in yellow at 'x'
-Should this structure x breakout, the retest has been successful. One may enter
-Should buyers come in with large amounts of volume this retest has been successful. One may enter.
Why? Well the whole point is 'not to be the first'. We need to see there are buyers present so this thing doesn't just die and mess us up.
Note again: Just because a retest shows buy volume or is supported for a few minutes, it does not mean there is a 100% it will breakout. We play with probabilities here. But more about this after.
What This Triangle Shows You
3 things can be seen in the above retest scenario:
-There is a failed selloff with an increase in volume (seen by the lower side wick)
-Break out of the 'retest zone' (yellow above would be classed as the retest zone)
-Quick movement away on a local timeframe
So - to wrap this up, there are two places we can enter this play (if we are taking a retest)
Below (Figure 4) shows this
Trigger One Entry: Shows that bears tried to sell off this retest but failed.A failure from bears to sell into support often means a reversal is more likely to take place.
Trigger Two Entry: Shows that price has both failed a sell off and blasted past a local level of resistance.
Now The Next Part - What If It Fails?
Well. The loss is to be accepted. Either then one tries again or leaves the play and re-assess. This is the game we play. You don't exactly know what the market is doing at any one time, however, there are a few things that can tip you off on whether the break + retest is more probable to follow through or not:
What We Find In Retests That Are More Likely To Go Up (And Vice Versa).
1. High liquidity assets (at-least in Crypto) as a rule of thumb produce the more reliable breakouts.
This is because it takes a lot of money to cause a pump. So you'd need a very large player to stop it. Also for something to follow through, there needs to be buyers. A shady low volume move over resistance is scenario for disaster.
2. Higher time-frame breakout retests are more likely than lower time-frame ones.
This is for the point above about liquidity. To get something to move on a higher time-frame it requires more capital.
The flip-side is also true. Lower time frame breakouts fail more often because it is easier to move the books
3. Breakouts that have a lot of compression before the break
The more windup before the breakout, the more likely it is to survive a retest once it breaks out. The skirmish that occurs between buyers and sellers builds up like a pressure cooker that not only leads to a strong break, but usually causes walls of bids to move up. This is because the buyers get so eager that the retest may not come at all.
The flip-side is also true. If there is little windup before the breakout, one should be more cautious.
4. High volume smash through resistance but low volume sell off into support. OR a high volume sell off that caused little price movement. I.E a lot of volume traded, price supports, and moves higher
We are looking for huge buy pressure past resistance, but that there were not many interested sellers. When you have an imbalance in the buyers favor, it hints at continuation. This is a strong sign the retest will be safe. You are simply looking for presence of buyers.