What is Retest in Trading?

What is Retest in Trading?

Retesting in trading refers to the price action that occurs when the market revisits a previous support or resistance level after breaking through it. This can happen in both trending and range-bound markets. A retest provides traders with a chance to confirm whether the previous level will hold, and it can often signal a potential opportunity for entering a trade.

In simpler terms, when the price breaks through a level of support or resistance, it may come back (or “retest”) that level to see if it can act as a new support or resistance. If the price successfully bounces off this level, it strengthens the trader’s confidence in the direction of the trend.

Why Are Retests Important in Trading?

The retest in trading is essential for several reasons:

• Confirmation of Trend: A retest can confirm that the trend is genuine. For example, if the price breaks above resistance and then pulls back to retest it as support, it indicates that the uptrend may continue.
• Improved Entry Points: Retests offer traders better entry points. Instead of chasing the market when it’s already far from a support or resistance level, waiting for a retest allows traders to enter at more favorable prices.
• Risk Management: With a retest, traders can place stop-loss orders just beyond the tested level, making it easier to manage risk. If the retest fails and the price breaks through the level, the stop-loss can help minimize losses.
• Market Psychology: A retest often reflects the psychology of the market participants. The market may hesitate at key levels before making its next move, and understanding this behavior can give traders a better idea of when to take action.

Types of Retests in Trading

There are several types of retests, and understanding their different characteristics can help traders identify opportunities.

1. Support Retest

When the price breaks a level of resistance and then returns to test it, the broken resistance level may become support. This is a bullish signal, as the price holds above the previous resistance, suggesting a continuation of the uptrend.

Example:

• Price breaks $100 resistance level.
• Price pulls back to $100 and bounces higher.

2. Resistance Retest

When the price breaks a level of support and then returns to test it, the broken support level may become resistance. This is a bearish signal, as the price fails to hold above the previous support, suggesting a continuation of the downtrend.

Example:

• Price breaks $50 support level.
• Price pulls back to $50 and falls further.

3. Breakout Retest

A breakout retest occurs when the price breaks through a significant level (support or resistance) and then comes back to retest that level before continuing in the direction of the breakout. This can be a powerful signal for confirming the breakout.

Example:

• Price breaks above $200 resistance level.
• Price pulls back to $200 and continues upwards.

How to Identify Retests in Trading

Identifying what is retest in trading involves analyzing price charts and identifying key support and resistance levels. Here’s how to spot them:

• Identify Key Levels: The first step is to identify key support and resistance levels on your chart. These are areas where the price has historically bounced or reversed direction.
• Watch for a Break: Look for a strong breakout, where the price decisively breaks through support or resistance levels.
• Wait for the Retest: After the breakout, wait for the price to pull back to the broken level and observe if it holds as new support or resistance.
• Look for Confirmation: If the price bounces off the broken level, confirming the retest, you can enter a trade in the direction of the trend.

How to Trade Using Retests

Once you've identified a retest, here are steps to trade it:

• Enter at the Retest Level: Once the price retests the level and shows signs of holding (such as a price bounce or a candlestick pattern), enter the trade in the direction of the trend.
• Use Stop-Loss Orders: Place a stop-loss order just below the support (in a bullish trend) or just above the resistance (in a bearish trend) to protect yourself in case the retest fails.
• Set Profit Targets: Use prior swing highs and lows to set realistic profit targets. For example, if you're trading a support retest, your target might be the next resistance level.
• Monitor Market Conditions: Keep an eye on overall market conditions and news that may affect the trend. A retest can sometimes be invalidated by significant news or market events.

Retest Trading Strategy Example

Let’s look at a retest trading strategy based on technical analysis:

Conclusion: Why Understanding Retests is Crucial

What is retest in trading, and why is it so important? Retests are critical for confirming the strength of a trend and providing a solid entry point for traders. By understanding how retests work and using them as part of your strategy, you can increase your chances of successful trades while minimizing risk.

As we've seen, retests provide opportunities to buy in uptrends and sell in downtrends at more favorable price levels. Identifying and trading retests can be a powerful tool in your trading arsenal.