The retest strategy is one of the most reliable ways to enter breakout trades with better risk-to-reward. Instead of chasing breakouts as they happen, you wait for price to come back and test the broken level. This confirmation gives you a better entry price and clearly defined risk.
What is a Retest?
A retest occurs when price breaks through a support or resistance level, moves away, and then returns to test that level from the other side. Former resistance becomes support on retests of upside breakouts. Former support becomes resistance on retests of downside breakouts.
The core concept: When a significant level breaks, the market often returns to "retest" whether that level will hold in its new role. This retest offers a second chance to enter the move with confirmation.
Why Retests Work
Understanding the psychology behind retests improves your trading:
- Confirmation: The retest proves the breakout level is now functioning as support/resistance
- Trader psychology: Those who missed the breakout get a second chance to enter
- Trapped traders: Those who faded the breakout exit their positions
- Clean risk: Stop loss can be placed just beyond the retested level
- Better entry: Entry price is often better than the original breakout
Types of Retests
Different retest scenarios require different approaches:
Breakout Retest
After price breaks above resistance, it pulls back to test that former resistance as new support. This is the most common retest setup.
Breakdown Retest
After price breaks below support, it bounces to test that former support as new resistance. Enter short when the retest fails to reclaim the level.
Trendline Retest
When a trendline breaks, price often returns to retest it. Broken uptrendlines become resistance; broken downtrendlines become support.
Moving Average Retest
After price breaks above or below a key moving average, it often retests that MA before continuing in the breakout direction.
Breakout Retest Example
Stock ABC breaks above $50 resistance after consolidating for 3 weeks:
- Breakout: Price spikes to $53 on strong volume
- Retest begins: Price pulls back over 2 days
- Retest level: Price returns to $50-$50.50 area
- Confirmation: Bullish engulfing candle at $50.20
- Entry: Buy at $50.50 on break of engulfing high
- Stop: $49.30 below the retest low
- Target: $56 (measured move from the breakout pattern)
Identifying Quality Retests
Not all retests lead to successful continuation trades:
Signs of a Strong Retest
- Volume decreases during the pullback to retest
- Price respects the level precisely (does not undercut significantly)
- Retest happens relatively quickly (within days, not weeks)
- Clear reversal pattern forms at the retest level
- Broader market supports the trade direction
Warning Signs of Failed Retest
- High volume on the pullback suggests distribution
- Price slices through the breakout level easily
- Multiple failed bounces at the level
- Too much time passes before the retest
- Sector weakness contradicts the trade direction
The golden rule: If price closes back below a broken resistance (or above broken support), the retest has failed. Exit immediately and consider the opposite trade.
Entry Techniques for Retests
Several methods help time retest entries precisely:
Candlestick Pattern Entry
Wait for a bullish reversal pattern (hammer, engulfing, inside bar breakout) at the retest level before entering.
Time-Based Entry
Enter after price has held above the level for a specific time period (e.g., 15 minutes, 1 hour, or a full day).
Break of Micro-Resistance
During the retest, draw a short-term downtrend line on the pullback. Enter when price breaks above this line.
Volume Confirmation
Wait for a volume spike at the retest level that shows buyers stepping in aggressively.
Breakdown Retest Example
Stock XYZ breaks below $40 support:
- Breakdown: Price drops to $37 on heavy volume
- Retest: Price bounces back toward $40
- Rejection: Price fails at $39.80 with bearish engulfing
- Entry: Short at $39.50 on break below pattern low
- Stop: $40.50 above the breakdown level
- Target: $35 (measured move)
Stop Loss Placement
Retest trades offer clear stop loss placement:
- Beyond the level: For long trades, stop below the retested support
- Beyond the retest extreme: Below the lowest point of the retest pullback
- ATR-based: 1-2 ATR beyond the level for volatile stocks
Profit Target Strategies
Multiple approaches to taking profits on retest trades:
- Measured move: Height of the breakout pattern projected from breakout point
- Next resistance: Take profits at the next significant resistance level
- Risk multiple: Target 2:1 or 3:1 reward-to-risk ratio
- Trailing stop: Trail stops using moving averages or swing lows
Managing Retest Trades
Active management improves retest trade results:
- Move stop to breakeven: Once price exceeds the original breakout high
- Take partial profits: Scale out at measured move targets
- Add on confirmation: Add to winners if they set up additional retests
- Exit failed retests fast: If the level breaks back through, exit immediately
Track Your Retest Trades
Pro Trader Dashboard helps you analyze how well you execute retest entries and whether waiting for retests improves your results.
Common Retest Mistakes
Avoid these errors in retest trading:
- Entering too early: Buying the pullback before it reaches the level
- No confirmation: Entering without a reversal signal at the level
- Wrong level: Misidentifying where the actual support/resistance is
- Ignoring failure: Holding when price breaks back through the level
- Missing the trade: Waiting too long and missing the continuation move
Timeframes for Retest Trading
The strategy works across all timeframes:
- Day trading: Intraday breakouts and retests within hours
- Swing trading: Daily chart breakouts with 1-3 day retests
- Position trading: Weekly breakouts with multi-week retests
Combining Retests with Other Strategies
Retest trading complements other approaches:
- Breakout trading: Use retests as secondary entries to breakout trades
- Trend following: Enter trends at retest points for better risk/reward
- Pattern trading: Confirm pattern breakouts with successful retests
Summary
Retest trading offers high-probability entries into breakout moves with clearly defined risk. When price breaks a level and returns to test it, the retest confirms the level is now functioning in its new role. Enter on confirmation signals at the retest level, place stops beyond the level, and target measured moves or the next significant level. Failed retests should be exited immediately - they may even provide opportunities in the opposite direction. With practice, retest trading becomes a reliable way to participate in trends without chasing breakouts.