The Ultimate Break and Retest Strategy: Your Complete Guide to Low-Risk High-Reward Trades

 A majority of traders will blow their accounts chasing breakouts. They are excited when the price breaks past a defining level until it turns around and heads back down. Are you familiar with this? This is precisely what the best break and retest strategy is designed to eliminate.

The strategy is very simple. A breakout occurs when the price breaks through a significant level of support or resistance. The retest will occur after the breakout has occurred. The price will pull back to the level it just broke through to test if that level is still valid. The previous level of resistance will act as new support, and prior support will act as new resistance. After the retest confirms the level has switched roles, that will be your entry point.

The Core Mechanics: Understanding Entry Signals

To successfully trade this set-up, you need to know what's happening beneath the surface. A breach of a resistance level indicates that buyers have successfully beaten the sellers at this level. However, markets don't move in one direction. 

After a big move, traders take the opportunity to take profits, and new short traders will enter the market; the price will pull back towards the point at which it broke out. This is completely normal; all you're looking for is confirmation that the level you're at either holds or does not.

Using RSI and Volume to Sharpen Your Entries

If prices are making higher lows while the RSI is forming lower lows during a retest, it indicates that momentum has built up despite the price declining a bit. If prices are making lower highs while the RSI is making higher highs during a retest, it indicates that there has been significant momentum built up, although the price may have declined slightly.

When you see divergences developing right at the retest area along with high volume at the breakout point, the likelihood that you will be able to succeed with your trade is dramatically increased. Volume also plays an important role, having two separate phases. First, there will be a large increase in volume during the breakout, which will help provide you with confirmation of the conviction behind the breakout. 

Multi-Timeframe Analysis for Optimal Entries

This is why, with the multi-timeframe approach, one examines the trend direction and key levels on a higher timeframe chart before determining exact entry points on a lower timeframe chart; this helps to separate out the signals from all of the noise around us.

The process begins by using a 4-hour or daily timeframe, examining the current trend direction - up or down - and whether the price has broken a significant support level. The more significant that level is, the further out from it the market will continue until there has been a successful retest.

Conclusion:

Once your setup has formed, before placing your trade, define all three of your entry parameters: your entry point, your stop loss, and your take profit. With Tradewill's order management tools, you can define all three before placing the trade, thus taking away the emotional component of the decision-making process after you're committed to the trade.

Use Tradewill's chart assembly tools to mark your breakout zone and your retest zone on the chart you've created. Having a clean and clutter-free chart that clearly identifies your key level will help eliminate second-guessing your trade when you're waiting for a confirmation.

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