Break and Retest 

Break and Retest 

Back and Retest strategy is perhaps the most commonly used strategy in technical analysis.Let’s explain how it works. 

 

Key steps for the identification of "Break & Retest" strategy

1. Desdobramento

The price convincingly breaks through a significant support or resistance level, accompanied by a strong increase in trading volume. This increase often signifies  a change in market sentiment. 

2. Retest

 After the breakout, the price returns to test the same level (previously broken). This retest usually confirms the importance of the given level. 

3. Reversal

Movements that indicate that the broken level now functions as new support (in the case of a bullish breakout) or resistance (in the case of a bearish breakout). 

How to gain confirmation and confidence in the signal

·        Verify if the breakout corresponds to the current trend. 

·        Lower volume on the retest compared to the breakout indicates that the new level is holding, while high volume at the breakout confirms its strength. 

·        Use additional technical analysis tools and candlestick formations, such as pin bars or engulfing bars (that appear at the retest level). 

·        Wait until the retest candle closes. Watch whether it closes clearly above (or below) the broken level before entering a trade. 

 

How to Trade the "Break and Retest" Strategy

·        Identify clearly defined support and resistance levels. These zones become potential breakout areas. 

·        Look for "quick" retests. Retests that take too long may imply market indecision. 

 

Exemplos:

-         In a bearish market: Look for breakouts below support levels that are then retested. If the price fails to return above this new resistance and continues downward, it signals a strengthening bearish trend. 

-         In a bullish market: Find breakouts above support levels that are then retested. 

·        Set stop-loss orders and realistic price targets.

Carefully calculate stop loss placement and set price targets in line with your trading system and risk management plan.