Imagine a castle gate (Resistance). If an army (Buyers) rushes the gate, they might break through, or they might get crushed. Buying the breakout is risky.
The Break & Retest strategy waits for the army to capture the gate, secure it, and then use it as a defensive position to launch the next attack. We are trading the "Flip": Resistance becoming Support (or Support becoming Resistance).
1. The Logic: Why Retests Happen — The Hidden Game
Why does price, after a decisive breakout, so often return to the scene of the crime before continuing its move? This isn't random; it's a fundamental interplay of market psychology and the mechanics of order flow. There are typically four key reasons:
- 1. Profit Taking: Early buyers (for a bullish breakout) who anticipated the move will often close partial positions immediately after the breakout, causing price to temporarily dip back towards the newly broken level.
- 2. Trapped Traders (Short Squeeze/Long Squeeze): Sellers who went short at the previous Resistance are now trapped underwater. When price comes back to their entry (now their breakeven level), they are eager to close their shorts (buy to cover), adding buying pressure and confirming the new Support. The opposite happens for a broken Support.
- 3. Smart Money Accumulation/Distribution: Large institutions need significant liquidity to fill their massive orders without moving the market against themselves too much. They often let retail FOMO drive the initial breakout, then let price retest the level to fill their huge buy (or sell) orders at a better average price.
- 4. Retail Psychology (The "Fear of Missing Out" Effect): New traders often chase breakouts impulsively, leading to the initial spike. As price retests, these traders, having bought high, panic and sell if the level doesn't immediately hold, providing further liquidity. The disciplined trader waits for confirmation.
2. The Framework: Don't Chase, Wait for Confirmation
Patience is your ultimate edge with the Break & Retest strategy. The temptation to chase a breakout is strong, but a professional waits for the market to confirm its intentions. Here's your four-step framework:
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Step 1: Identify a Clean Level of Support or Resistance
Look for a horizontal Support or Resistance level that has been clearly respected (touched at least 2-3 times) in the past. The clearer and more obvious the level, the better the reaction will likely be. Avoid "fuzzy" zones. Ideally, the level should align with a higher timeframe structural point.
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Step 2: Observe the Impulse Break
Price must smash through the level with conviction. Look for a Large Body Candle closing decisively beyond the level. Weak wicks that briefly poke through, or small, indecisive candles, do not count as an impulse break. We need clear intent from the market to violate the old boundary.
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Step 3: Wait for the Retest (Deceleration & Confirmation)
This is the critical step where amateurs get caught chasing. Price will drift back to the newly broken level. During this retest, you want to see a deceleration of momentum. Look for smaller candles, decreasing volume, and signs of exhaustion as price approaches the level. If price crashes back down with huge red candles (after a bullish break), it's a strong sign of a fakeout and an invalid retest.
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Step 4: Look for a Trigger Candle at the Retest
Once price hits the retest level, wait for a specific candlestick pattern that confirms rejection and a continuation of the new trend. This could be a bullish engulfing candle, a hammer/pinbar with a long wick rejecting the level, or a strong green candle closing above the retested level. This is your precise entry signal.
3. Aggressive vs. Conservative Entry Approaches
There are typically two ways to enter a Break & Retest trade, each with its own advantages and disadvantages:
The "Limit Order" Entry (Aggressive)
You place a Buy Limit order (for a long retest) directly on the newly flipped level, hoping to get filled at the perfect price.
Pros: Offers the best possible entry price and thus the highest potential R:R.
Cons: Lower win rate, as price may not always perfectly retest the level, or may crash through it. You are literally trying to catch a falling knife without confirmation.
The "Confirmation" Entry (Conservative)
You wait for a bullish candlestick confirmation (your trigger candle) *after* price has touched and rejected the retest level.
Pros: Higher win rate, as the market has given you confirmation that the level is holding. Safer entry.
Cons: Slightly worse entry price, which reduces your R:R. You "pay for safety."
Recommendation: Start with the Confirmation Entry. As you gain screen time and confidence, you can experiment with limit entries on lower timeframes for specific setups.
4. Confirmation Tools for the Retest: Building Confluence
While price action at the retest is paramount, you can increase your conviction by looking for additional confluence factors:
- Volume Profile: If there's a significant "Volume Node" (an area of high historical volume) at or near your retest level, it adds strength. This indicates that many participants exchanged hands at that price, making it a stronger magnetic zone.
- Moving Averages: Is a key Moving Average (e.g., 50 EMA or 200 EMA) converging with your retest level? This adds a dynamic support/resistance layer.
- Fibonacci Retracement: Does the retest occur at a key Fibonacci retracement level (e.g., 50% or 61.8%) of the impulse move? This signals a high-probability reversal zone.
- Higher Timeframe Alignment: Always check your higher timeframe. Is the retest happening at a higher timeframe Support/Resistance, Order Block, or other significant point of interest? This adds powerful confluence.
5. Risk Management: Defining Your Invalidation
Position sizing is critical. Ensure your 1R risk is appropriate for the trade. As always, your stop loss defines where your trade idea is wrong:
For a bullish Break & Retest, if the former Resistance has become Support, price should not go back deep into the old range.
Stop Loss Placement: Place your stop loss logically below the swing low of the breakout candle, or below the wick of the retest candle, or below the structural level itself. Add a small buffer using ATR to account for "wicks" and stop hunts, but ensure it's still below your invalidation point.
Take Profit Strategy: Trading to the Next Liquidity
- TP1 (Partial Profit): Target the previous high that initiated the current move. Take 50% of your position off here and immediately move your stop loss to breakeven (or a structural point above your entry). This guarantees a risk-free trade and locks in some profit.
- TP2 (Runner): For the remaining position, trail your stop loss under a key moving average or structural point until the trend bends. Target the next major supply zone or liquidity area on a higher timeframe.
6. The "Liquidity Grab" Trap (Fakeouts): How to Avoid Getting Bag-Held
Often, price breaks a level, triggers a wave of buy/sell orders from impatient traders, and immediately reverses, trapping them. This is a Fakeout (or SFP - Swing Failure Pattern). Distinguishing a real break from a fakeout is crucial:
- Time & Price Action: Does price spend time *above* the broken level after the initial break, consolidating? Or does it reject instantly and crash back into the old range? A real break often involves consolidation above the flipped level.
- Candle Close vs. Wicks: A true break is confirmed by a candle *body* closing decisively above the level (for an uptrend). Wicks that briefly poke through the level but then close back inside are strong signs of a fakeout.
- Volume Confirmation: Real breaks often have higher-than-average volume, indicating institutional participation. Low volume breaks are suspicious and should be treated with caution.
By waiting for the retest and confirmation, you inherently avoid most fakeouts, as the retest either holds (confirming the break) or fails (signaling a fakeout).