Retest Strategy

1. Retest Strategy: A Beginner's Guide

The Retest Strategy is a popular and relatively straightforward trading approach used by both beginner and experienced traders across various financial markets, including Forex, stocks, cryptocurrencies, and commodities. It's based on the principle that after a price breaks through a significant level of support or resistance, it often revisits that level to "retest" it before continuing in the direction of the breakout. This article will provide a comprehensive understanding of the Retest Strategy, covering its core concepts, variations, risk management, and practical implementation.

Core Concepts

At its heart, the Retest Strategy relies on understanding *support* and *resistance* levels.

• Support: A price level where buying pressure is strong enough to prevent the price from falling further. Think of it as a floor.
• Resistance: A price level where selling pressure is strong enough to prevent the price from rising further. Think of it as a ceiling.

When a price breaks through a resistance level, it signifies bullish strength, and the former resistance often transforms into support. Conversely, when a price breaks through a support level, it signifies bearish strength, and the former support often transforms into resistance.

The 'retest' occurs when the price returns to this broken level. Traders using the Retest Strategy look for opportunities to enter a trade in the direction of the original breakout during this retest, anticipating that the level will hold and the price will continue its initial trajectory.

The rationale behind the retest phenomenon is multi-faceted. It can be attributed to:

• Liquidity Grab: Breakouts often attract traders who were waiting for confirmation. The retest provides these traders with a second chance to enter the market at a potentially better price.
• False Breakout Filtering: Not all breakouts are genuine. A retest helps to filter out false breakouts, where the price briefly moves beyond a key level before reversing. A successful retest strengthens the validity of the breakout.
• Institutional Manipulation: Some believe that large institutional traders intentionally push prices through levels, then retrace to allow others to enter before continuing their intended direction.
• Psychological Levels: Support and Resistance levels are often psychologically significant for traders, leading to increased buying or selling activity.

Types of Retests

Retests aren’t always identical. Understanding the different types can help refine your trading strategy.

• Clean Retest: The price returns *exactly* to the broken level and bounces immediately. This is the most desirable type, offering a high-probability setup.
• Imperfect Retest: The price revisits the broken level but doesn't quite touch it, or it lingers for a while before bouncing. This requires more careful consideration and confirmation.
• Pullback Retest: The price pulls back to a key moving average (e.g., the 20-day MA) which coincides with the broken level. This adds an extra layer of confirmation. See also Exponential Moving Average (EMA).
• Fake Retest/Failure to Retest: The price fails to retest the broken level at all, continuing in the breakout direction. This can occur in strong trending markets. Traders need to adjust their strategy accordingly.

Identifying Retest Opportunities

Identifying potential Retest opportunities involves several steps:

1. Identify Key Support and Resistance Levels: Use historical price data to identify significant levels. Look for areas where the price has repeatedly bounced or reversed. Techniques include:

   *   Pivot Points:  Calculate pivot points based on the previous day’s high, low, and close. Pivot Points are commonly used for intraday trading.
   *   Fibonacci Retracements: Use Fibonacci retracement levels (23.6%, 38.2%, 50%, 61.8%, 78.6%) to identify potential support and resistance areas. Fibonacci retracement is a powerful tool for identifying potential reversal points.
   *   Trendlines: Draw trendlines connecting successive highs or lows to identify potential support and resistance areas. Trendlines are fundamental to technical analysis.
   *   Round Numbers:  Prices often react to psychological round numbers (e.g., 1.0000, 100.00, 1000).

2. Look for Breakouts: Monitor price action for breakouts above resistance or below support. The breakout should be accompanied by strong volume to confirm its validity. Consider using Volume Spread Analysis (VSA) to assess breakout strength.

3. Wait for the Retest: Once a breakout occurs, patiently wait for the price to retest the broken level. Don't rush into a trade.

4. Confirmation: Look for confirmation signals at the retest level. These signals can include:

   *   Candlestick Patterns:  Bullish candlestick patterns (e.g., bullish engulfing, hammer, piercing line) during a retest of a former resistance level suggest a continuation of the uptrend. Bearish candlestick patterns (e.g., bearish engulfing, shooting star, hanging man) during a retest of a former support level suggest a continuation of the downtrend. Candlestick patterns provide valuable insights into market sentiment.
   *   Moving Average Support/Resistance:  If the retest coincides with a key moving average, it adds to the confirmation.
   *   Trendline Support/Resistance:  A retest bouncing off a trendline adds further confirmation.
   *   Indicators: Use indicators like the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Stochastic Oscillator to confirm the momentum and strength of the breakout.  Overbought/oversold conditions can be particularly useful.  Also consider the Average Directional Index (ADX) to measure trend strength.

Entry, Stop Loss, and Take Profit

• Entry: Enter a long trade (buy) when the price bounces off the retested former resistance level (now support) with confirmation signals. Enter a short trade (sell) when the price bounces off the retested former support level (now resistance) with confirmation signals.
• Stop Loss: Place your stop loss *below* the retested former resistance level (for long trades) or *above* the retested former support level (for short trades). This protects you in case the retest fails and the price continues in the opposite direction. A common approach is to add a small buffer (e.g., a few pips/ticks) to the stop loss to account for volatility.
• Take Profit: Determine your take profit target based on:

   *   Risk-Reward Ratio:  Aim for a risk-reward ratio of at least 1:2 or 1:3. This means that your potential profit should be at least two or three times greater than your potential loss.
   *   Next Resistance/Support Level:  Set your take profit target at the next significant resistance level (for long trades) or support level (for short trades).
   *   Fibonacci Extensions: Use Fibonacci extension levels to identify potential profit targets. Fibonacci extension is useful for projecting price movement.
   *   Trailing Stop Loss: Consider using a trailing stop loss to lock in profits as the price moves in your favor.

Risk Management

Effective risk management is crucial for success with the Retest Strategy.

• Position Sizing: Never risk more than 1-2% of your trading capital on a single trade. Calculate your position size carefully based on your stop loss distance.
• Avoid Overtrading: Don't force trades. Wait for high-probability setups that meet your criteria.
• Diversification: Don't put all your eggs in one basket. Diversify your trades across different markets and asset classes.
• Understand Market Conditions: The Retest Strategy works best in trending markets. Avoid using it in choppy or sideways markets. Use Ichimoku Cloud to identify trending markets.
• News Events: Be aware of upcoming news events that could impact the market. Consider avoiding trading around major economic releases. Refer to an economic calendar.

Variations and Advanced Techniques

• Multiple Timeframe Analysis: Confirm the breakout and retest on multiple timeframes. For example, you might identify a breakout on the daily chart and then look for a retest setup on the 4-hour or 1-hour chart.
• Combining with Other Strategies: Combine the Retest Strategy with other technical analysis techniques, such as Elliott Wave Theory, Harmonic Patterns, and Price Action Trading.
• Using Volume Confirmation: Pay close attention to volume during the breakout and retest. Increasing volume during the breakout and decreasing volume during the retest are positive signs.
• Dynamic Support and Resistance: Use dynamic support and resistance levels, such as moving averages and trendlines, in conjunction with static levels.
• Pattern Retests: Look for retests of chart patterns like Head and Shoulders, Double Top/Bottom, and Triangles.

Backtesting and Demo Trading

Before risking real money, it's essential to backtest the Retest Strategy using historical data to assess its effectiveness. Also, practice trading the strategy on a demo account to gain experience and refine your skills. Tools like TradingView offer excellent backtesting and charting capabilities.

Resources and Further Learning

• Babypips: [1] – A comprehensive Forex education website.
• Investopedia: [2] – A valuable resource for financial definitions and concepts.
• TradingView: [3] – A popular charting platform with social networking features.
• Books on Technical Analysis: Explore books by authors like John Murphy, Robert Kiyosaki, and Alexander Elder.
• Online Courses: Platforms like Udemy and Coursera offer courses on technical analysis and trading strategies.
• DailyFX: [4] - News and analysis on Forex markets.
• FXStreet: [5] - Forex news and analysis.
• Bloomberg: [6] - Financial news and data.
• Reuters: [7] - Financial news and data.
• Trading Economics: [8] - Economic indicators and forecasts.
• StockCharts.com: [9] - Charting and analysis tools for stocks.
• CoinMarketCap: [10] - Cryptocurrency market data.
• Trading with Volume: [11] - Resource on Volume Spread Analysis.
• The Pattern Site: [12] - Charts and information on chart patterns.
• Trend Hunter: [13] - Identifying market trends.
• MarketWatch: [14] - Financial market news and analysis.
• Seeking Alpha: [15] - Investment research platform.
• Kitco: [16] - Precious metals news and prices.
• GoldPrice.org: [17] - Gold price information and analysis.
• OilPrice.com: [18] - Oil market news and analysis.
• ForexFactory: [19] - Forex forum and calendar.
• BabyPips Forum: [20] - Forex trading forum.
• Investopedia's Technical Analysis Basics: [21]
• Fibonacci Retracement Guide: [22]

The Retest Strategy is a valuable tool for traders of all levels. By understanding its core concepts, variations, and risk management principles, you can increase your chances of success in the financial markets. Remember to practice diligently and continuously refine your strategy based on your experience and market conditions.

Technical Analysis Support and Resistance Candlestick Patterns Moving Averages Risk Management Trading Psychology Breakout Trading Trend Following Chart Patterns Fibonacci Retracement

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