The break and retest strategy is a simple yet powerful trading method that focuses on identifying key price levels, waiting for a breakout, and entering after a successful retest. Here’s what you need to know:
- Core Idea: Once a support or resistance level is broken, it often becomes a new zone of interest. A retest of this level provides a high-probability trade entry.
- Why Traders Use It: It’s clear, easy to follow, and works across multiple markets like forex, stocks, and commodities. Win rates often range from 60–70%.
- Tools You Need: High-performance trading computers and reliable charting platforms like TradingView or MetaTrader help ensure precision and speed.
- How to Confirm Breakouts: Look for increased volume, momentum indicators, and candlestick patterns to validate breakouts and retests.
- Risk Management: Use stop-loss orders, position sizing (risking no more than 1% per trade), and trailing stops to protect your capital and maximize gains.
This strategy is all about discipline, proper execution, and having the right tools to stay ahead in fast-moving markets.
How to Identify and Confirm Breakouts and Retests
Finding Key Support and Resistance Levels
To spot potential breakouts, start by identifying key support and resistance levels – areas where price often stalls or reverses. Support acts like a floor, slowing or reversing downward price moves, while resistance serves as a ceiling, halting or reversing upward momentum.
"Support and resistance are common terms that traders use to describe levels where price is more likely to stop moving in one direction or change direction." – CME Group
Moving averages can help pinpoint these levels. For example, prices trading above a moving average often find it as support, while prices below it may treat it as resistance. Many traders rely on multiple timeframes, such as the 20-day, 50-day, and 200-day moving averages, to identify potential zones of interest.
Take Crude Oil (CL) as an example. For years, the $100 level acted as a formidable resistance – each breakout attempt resulted in a retracement back to this critical zone.
Trendlines can refine your understanding further. In an uptrend, connecting higher lows creates upward-sloping support lines, while in a downtrend, linking lower highs establishes resistance. A chart of Newmont Corp. (NEM) shows how a trendline consistently acted as support over several years.
Fibonacci retracements (38.2%, 50.0%, 61.8%) add another layer of confirmation for key levels. Using multiple methods together strengthens the reliability of your analysis and provides a clearer picture when breakouts occur.
Once you’ve identified these levels, focus on volume and momentum to validate a breakout.
Using Volume and Momentum to Confirm Breakouts
A genuine breakout is usually accompanied by a noticeable spike in trading volume, signaling strong market participation. Momentum indicators complement this by showing clear shifts in price action. For instance, long candlesticks with minimal shadows reflect decisive sentiment, where one side – buyers or sellers – has taken control.
Chart patterns can also confirm breakouts with high success rates. Research shows that ascending triangles predict continued uptrends about 75% of the time, double bottom patterns forecast bullish reversals with a 70% success rate, and bullish flag patterns signal upward continuations roughly 75% of the time.
It’s often smarter to wait for confirmation before acting on a breakout. Look for above-average volume as a key indicator, and consider waiting until near the close of the trading period to ensure the price holds above the breakout level.
Once volume and momentum confirm the breakout, candlestick patterns can help validate the retest.
Confirming Retests with Candlestick Patterns
After a breakout, a successful retest often signals an ideal entry point. Specific candlestick patterns provide valuable confirmation during this phase.
Single candlestick patterns reveal quick insights into market sentiment. For example, the Hammer pattern – a small body with a long lower shadow – suggests a bullish reversal when it forms at support. Similarly, Inverted Hammer and Dragonfly Doji patterns indicate that selling pressure is easing, and buyers are stepping in.
Double candlestick patterns offer stronger signals. A Bullish Engulfing pattern, where a bullish candle completely engulfs the previous bearish candle, highlights a clear shift in sentiment. Tweezer Bottom patterns, with nearly identical lows across two candles, also suggest strong support at that level.
Triple candlestick patterns, like the Morning Star, provide even more confirmation but require patience. This pattern typically begins with a bearish candle, followed by a small-bodied candle signaling indecision, and ends with a strong bullish candle that closes well into the first candle’s body.
When confirming retests, it’s crucial to wait for the next candlestick to validate the pattern before entering a trade. During pullbacks, smaller candles with shadows pointing toward the broken level often indicate the market is testing the level without breaking back through it. A strong candle in the direction of the breakout afterward confirms the continuation.
Indicators like RSI and Bollinger Bands can further reinforce your analysis. RSI values near 30 during bullish retests, or near 70 during bearish ones, strengthen your conviction. Similarly, price action near Bollinger Band boundaries often aligns with key support or resistance levels.
The ULTIMATE Break & Retest Strategy (Most Traders Fail Without This)
Step-by-Step Trading Process
Once you’ve identified key levels and breakout signals, it’s time to execute your trades with precision. Here’s how you can do it effectively.
Setting Up Your Charts
Start by marking the key support and resistance levels on your chart using horizontal lines. These are areas where the price has repeatedly reversed or consolidated.
Next, add the 50- and 200-period EMAs (Exponential Moving Averages) to determine the market’s trend direction. For bearish setups, a downward-sloping 50 EMA can confirm a bearish bias and help you decide where to place stop-loss levels.
Incorporate volume indicators to detect genuine breakouts – spikes in volume often validate these moves. Many traders also use Fibonacci retracements to find confluence zones, where multiple technical factors align, offering stronger signals.
To further refine your analysis, include the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). These tools provide insights into momentum shifts, helping you confirm breakouts and retests. If possible, use a multi-monitor setup to track everything efficiently.
With your charts ready, you can now focus on spotting breakout and retest signals.
Watching for Breakouts and Retests
Breakouts are more reliable when confirmed by multi-timeframe analysis and volume spikes. Start by identifying the broader trend on higher timeframes, then zoom in to shorter periods to find precise entry points.
Wait for the price to retest the broken level. This retest phase often provides a high-probability entry opportunity as it confirms the level’s new role in the market structure.
"The entry doesn’t need to be instant. What matters is that the market respects the level and shows hesitation or rejection. That’s your signal, not the breakout itself, but the way price behaves after." – XS.com
During the breakout, watch for strong RSI support, and during the pullback, look for neutral RSI behavior. Additionally, candlestick patterns like pin-bar candles with long wicks can signal price rejection. For example, in the EURUSD pair, these patterns often indicate a reliable retest.
Entering and Managing Trades
Once you’ve confirmed a valid retest, it’s time to execute your trade. For instance, in the EURUSD example, a market order could be placed after a pin-bar candle closes, confirming rejection of higher prices.
Set your stop-loss strategically to limit potential losses. In bearish setups, place it just above the last swing high or near the 50-period EMA. In bullish setups, position it below key support levels. This approach ensures your trade has enough room to develop while protecting your capital.
Define your profit targets based on prior price action and aim for a 1:3 risk-reward ratio. As the trade progresses, adjust your stop-loss to break-even or use a trailing stop to lock in profits . Stick to your risk management plan and avoid making impulsive changes to your strategy.
Effective trade management means staying flexible and adapting to how price action unfolds.
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Trading Tools and Hardware Requirements
To effectively execute the break and retest strategy, you’ll need reliable charting software and high-performance hardware. Your trading setup plays a crucial role in ensuring fast execution, seamless data processing, and overall efficiency. These tools and hardware components are essential for the precise implementation of the strategy we discussed earlier.
Best Charting Platforms to Use
When it comes to charting platforms, a few stand out for their features and reliability:
- TradingView: Known for its powerful charting tools, real-time data feeds, and active social trading community. Monthly plans range from $15 to $60.
- TrendSpider: Offers automated technical analysis with AI-driven tools that identify key support and resistance levels. Annual billing for the Premium plan starts at $30–$40 per month.
- NinjaTrader and TradeStation: Perfect for advanced traders, these platforms provide robust backtesting and automated trading capabilities.
- MetaTrader: A favorite among forex traders for its comprehensive tools.
- Trade Ideas: Equipped with AI-powered pattern recognition and automated breakout detection. The Premium plan costs $228 per month or $167 with annual billing.
Here’s a quick comparison of these platforms:
| Platform | Rating | Monthly Cost | Best For |
|---|---|---|---|
| TrendSpider | 4.8/5.0 | $30–$40 | AI-powered analysis |
| Trade Ideas | 4.7/5.0 | $167–$228 | Day traders seeking AI alerts |
| TradingView | 4.6/5.0 | $15–$60 | Social trading & charting |
| TradeStation | 3.8/5.0 | Varies | Active U.S. traders |
These platforms perform best when paired with hardware designed for fast and efficient data processing.
Advantages of Custom Trading Computers
Custom-built trading computers are designed to handle high-frequency transactions and analyze complex data with ease. Here are the key components that make them stand out:
- Processing Power: The Lite model features the AMD Ryzen 5600X, while the Pro and Ultra models use AMD Ryzen 7900X and AMD Ryzen 9800X3D, respectively. These processors ensure quick data processing and flawless execution of trading strategies.
- Memory and Storage: Equipped with top-tier DDR5 memory and NVMe SSDs, these systems provide smooth multitasking. The Lite model includes 32GB of RAM and a 1TB NVMe SSD, the Pro model upgrades to 64GB of RAM and a 2TB NVMe SSD, and the Ultra model boasts 128GB of RAM with a 4TB NVMe SSD.
- Multi-Monitor Support: While dual monitors are standard, these systems can handle additional screens for traders who need expanded display setups.
- Network Optimization: With wired Ethernet connections, these systems minimize latency. For example, fiber internet can achieve latencies as low as 10–12ms, outperforming cable or DSL connections.
DayTradingComputers offers three performance tiers to cater to different needs:
- Lite: $3,569 – NVIDIA GeForce RTX 3070 Ti SUPER, 32GB DDR5 RAM, AMD Ryzen 5600X, 1TB NVMe SSD.
- Pro: $4,569 – NVIDIA GeForce RTX 4070 Ti SUPER, 64GB DDR5 RAM, AMD Ryzen 7900X, 2TB NVMe SSD.
- Ultra: $5,569 – NVIDIA GeForce RTX 4090 SUPER, 128GB DDR5 RAM, AMD Ryzen 9800X3D, 4TB NVMe SSD.
Combining these high-performance systems with VPS services ensures uninterrupted trading.
VPS Services for Continuous Trading
Virtual Private Server (VPS) services are a game-changer for traders who rely on automated systems. They keep your trading strategies running even if your local computer is offline. Here’s why they’re indispensable:
- Uptime Reliability: Most VPS providers guarantee 99.9% uptime, ensuring your trading systems remain active around the clock.
- Enhanced Security: VPS environments come with advanced cybersecurity measures to protect against malware and other threats.
- Reduced Latency: By hosting servers near financial hubs, VPS services enable faster trade execution – an edge in algorithm-driven markets.
- Backup Power Solutions: Many providers include Uninterrupted Power Supply (UPS) systems and backup generators, so power outages won’t disrupt your trading.
Risk Management and Performance Optimization
Successful break and retest trading relies heavily on disciplined risk management. By using systematic methods, traders can remove emotional biases from their decisions. These strategies not only help safeguard against losses but also create opportunities to optimize gains.
Using Stop-Loss Orders and Position Sizing
Position sizing is at the heart of effective risk management. A common guideline is the 1% rule, which advises risking no more than 1% of your total capital on a single trade. This conservative approach ensures that even a streak of losses won’t severely impact your trading account.
"Position sizing is the glue that holds together a sound trading system. It ensures you don’t over-leverage or under-commit in any single trade, helping you stay in the game long enough to let your edge play out over a series of trades." – Brijesh Bhatia, Equity Capital Market Analyst, Definedge
To understand the importance of position sizing, consider its impact on drawdowns. For instance, risking 1% per trade limits drawdowns to about 13% after 14 consecutive losses, while a 2% risk increases that to roughly 25%.
Stop-loss orders are another essential tool, acting as a safety net by automatically closing trades at predetermined price levels. When setting stop-losses, factors like your risk tolerance, account size, market volatility, and the distance to the stop-loss level should guide your decisions. Many seasoned traders also avoid overconcentration by limiting themselves to no more than two positions in closely related instruments. Similarly, managing margin allocation prevents overexposure during volatile market conditions.
Maximizing Profits with Trailing Stops
Trailing stops are a powerful way to lock in profits while allowing trades to capitalize on extended price movements. Unlike fixed stop-loss orders, trailing stops adjust dynamically as the market moves in your favor, ensuring gains are protected while still giving trades room to grow.
The key to using trailing stops effectively is finding the right balance between avoiding premature exits and maximizing profits. For example, short-term stock trades often require trailing stops of 8–12%, while longer-term positions might need 15–20%. Volatile assets like cryptocurrencies typically demand even wider stops, ranging from 20–25%.
Imagine NVIDIA hitting new highs – an appropriately set trailing stop could secure profits of 20% or more. However, market conditions can influence the effectiveness of trailing stops. During periods of high volatility, you might adjust your stop distance to 1.5–2 times the Average True Range (ATR). Similarly, widening stop distances during the first 30 minutes of market activity or major news events can help prevent unnecessary exits. Regularly reviewing and adjusting your strategy ensures these tools remain effective as market dynamics shift.
Reviewing Your Trading Setup Performance
Strong risk management is only part of the equation – your trading setup must also perform reliably. Regularly evaluating your tools and strategies can help you identify areas for improvement and avoid repeating mistakes. A detailed trading journal is an invaluable resource for this. Recording entry and exit points, trade rationale, market conditions, strategies used, and outcomes allows you to uncover patterns that might otherwise go unnoticed.
Fast markets demand efficient systems. Regularly check your system’s execution speed, data feed reliability, and multi-monitor setup to ensure everything is running smoothly. Evaluating order routing, execution speed, and confirmation processes can also help streamline workflows. Simplifying steps or automating manual tasks reduces errors and increases efficiency.
Backup plans are equally important. Test your contingency strategies regularly and update them as needed to maintain trading continuity during system failures or internet outages.
The goal isn’t to perfect every trade but to consistently improve your overall approach. By combining sound risk management practices with a dependable trading setup, you create a robust framework for executing the break and retest strategy with confidence.
Conclusion: Mastering the Break and Retest Strategy
The break and retest strategy provides traders with a structured way to tap into market momentum while keeping risks under control. To succeed with this approach, three key factors come into play: precise execution, disciplined risk management, and a dependable trading setup.
Accurately identifying genuine breakouts is crucial. This often involves confirming moves with trading volume and clearly defined support and resistance levels. Risk management is equally vital – without a sound plan, even the best strategies can falter. A strong risk management framework is the backbone of this method. Additionally, having a reliable trading infrastructure is non-negotiable for putting these strategies into action.
Your trading system plays a pivotal role in executing this strategy effectively. In the U.S., high-frequency trading now makes up over half of all stock trades, emphasizing the importance of speed and system reliability in today’s markets. Standard systems often fall short under the pressure of real-time trading demands, with slower systems leading to slippage and missed opportunities.
To keep up, specialized trading computers are designed to handle complex tasks, process high-speed data streams, and execute advanced algorithms seamlessly. Look for systems equipped with at least 8 processing cores, high-performance processors (with maximum boost speeds between 4.5–5.8 GHz), and a minimum of 32 GB of RAM. These specifications ensure you can react to market movements and execute trades instantly, without delays.
FAQs
How can I use candlestick patterns to confirm a retest in the break and retest strategy?
To confirm a retest in the break-and-retest strategy, pay close attention to reversal candlestick patterns that form at the retest level. For bullish setups, patterns like the hammer, bullish engulfing, or morning star are worth noting, as they often indicate strong support and a potential upward price movement. On the flip side, for bearish setups, look for patterns such as the bearish engulfing, shooting star, or evening star, which can signal resistance and a possible downward reversal.
These candlestick patterns serve as visual indicators that the retest level is holding firm. They help you spot false breakouts and refine your trade entries. When combined with sound risk management and reliable charting tools, these patterns can significantly enhance the accuracy of your trades.
What’s the best way to set stop-loss orders when using the break and retest strategy?
When using the break-and-retest strategy, placing your stop-loss correctly is key to protecting your trade while steering clear of unnecessary exits caused by market noise. For long trades, set your stop-loss just below the retested support level. For short trades, position it slightly above the retested resistance level.
Be cautious about setting stop-loss orders too tightly. Small price movements can trigger them too early, cutting your trade short unnecessarily. Instead, allow your trades some breathing room while still maintaining control over your risk. This balance helps you stay in the market long enough to potentially secure profits while keeping losses manageable.
Why do you need a high-performance trading computer for the break and retest strategy, and what specs should it have?
A high-performance trading computer is a must-have for effectively implementing the break and retest strategy. It enables you to work with multiple charts simultaneously, analyze real-time data, and execute trades without delay. This level of speed and efficiency is critical for keeping up with fast-moving markets and seizing profitable opportunities as they arise.
When selecting a trading computer, prioritize these key specs: a multi-core processor (such as an Intel Core i7/i9 or AMD Ryzen 7/9 with a clock speed of at least 3.5 GHz), 16 GB or more of RAM for smooth multitasking, and a solid-state drive (SSD) for quick data access. These features ensure low latency, consistent performance, and the capability to handle resource-intensive trading software, giving you an edge in the market.
