Waiting For A Retest Will Make You A Better Forex Trader (2024)

If you have been a reader of this site for more than a day or two, you have undoubtedly seen me write, “wait for a retest” in the commentary. If you haven’t seen this yet, take a look at any of the recent setups and you are sure to find it there.

What may not be so apparent is the importance of waiting for a retest. What exactly does it represent and why is it so important?

I have been receiving a lot of similar questionsrecentlyso I decided to dedicatea lesson to the topic of retests. By the time you finish reading this lesson you will understand the significance of retests and why they need tobe a critical part of your trading if you wish to succeed.

But before we get into the detailsit’s important that you understand what a retest is as well asthe various ways it can occur.

What is a Retest in Forex?

Retests in the Forex market come in all shapes and sizes. They can come after a market breaks a key horizontal level of support or resistanceor a breakout from a wedge pattern.

Regardless of how or where the retest occurs, the characteristics are the same. The image below illustrates a few of the various ways retests can occur.

As you can see from the image above, retests can occur on a variety of price action patterns. In fact, I can’t think of a single pattern that doesn’t prompt a retest more often than not.

But seeing an image of oneoreven watching one as it forms on yourchart doesn’t tell the whole story. You have to know why it happens in order to fully understand the importance.

Why Market Retests Happen

Start thinkingof retests as a market’s way of “resetting” itself.These resets are needed as the balance between buyers and sellers is in constant flux. This ever-changing balanceis what createsswing highs and swing lows.

It goes without saying that whenever you buy or sell you are looking for a move in the intended direction. But in order for the market to do that, itneeds a fresh set of buyers or sellers. Otherwise, you will find yourself buying at the top and selling at the bottom.

Flushing out the weak hands

The term, “weak hands” refers to any group of traders (usually retail) who are not comfortable holding a position through increased volatility for the opportunity to make larger gains. These are usually the traders who are too risk-averse and therefore get stopped out prematurely before a larger move ever gets going.

Of course, there are also those who trade the lower time frames and therefore aren’t looking for the larger opportunity. These traders are completely happy to take their profits early and often.

Either way, both scenarios create swing highs and lows. However, there is an underlying dynamic that isn’t immediately apparent.

To explain this dynamic further, let’s take a look at an example. The GBPCAD 4 hour chart below shows the pattern in focus.

As you can see, the chart above showsa descending channel that intersected with a long-term support level. This support area eventually led to a break of channel resistance which is highlightedabove.

Now let’s take a closer look at the breakout and retestto identify the activity between buyers and sellers.

Don’t worry, the chart above isn’t nearly as confusing as it may seem at first glance. The first thing to noteis that those who bought in from Wave A and Wave B who are still holding want to book at least some profit at the second swing high after the breakout.

This selling drives the market lower which eventually produces a retest. Those who bought as soon as the market confirmed the breakout are already at a loss. This is why it’s so important to always wait to flush out the weak hands.

However, the most important point to take away from the chart above is that Wave C is where we want to buy. This area represents the strongest group of buyers and therefore signals the greatest potential for a sustained move higher.

In essence, thischartillustrates the basic ebb and flow of amarket which is influenced by the balance between buyers and sellers. That’s really what waiting for a retest is all about. We want to wait for the market to flushout the weak hands before we put any capital at risk.

Wait for Confirming Price Action

It isn’t enough to simply see the market touch a broken level as new support or resistance. And if you think about it, that doesn’t actually qualify as a retest.

If we separate the second half of the term you’ll see why. We are looking for a re”test”, not a re”touch”. So when the market revisits a level after breaking it, we want to see ittest that level as new support or resistance. The confirming price action is how we evaluate that test.

What is confirming price action, you ask?

Put simply, it’s either a bullish or bearish pin bar at the new level of support or resistance. The EURGBP daily chart below is a great example of how we can use a price action signal to help confirm a breakout.

Notice how EURGBP formed a bearish pin bar several days after breaking wedge support. Those who entered on the first “retouch” after the break would have been stopped out. Yetthose who remained patient and waited for confirming price action would have ended up with a 4R trade if using a 50% entry.

We actually traded this setup inside the Daily Price Action member’s area for a healthy 4R profit (8% if risking 2%). Nota bad return for just five days of trading.

At this point, you may be wonderingwhat happens if the market doesn’t retest thebroken level. My rule for thatsituation is simple – I pass on the opportunity andlook for something more favorable.

There aren’t many guarantees I can make to a Forex trader. I can’t guarantee profits on any particular setup just as I can’t guarantee your success as a trader. But one thing I can guarantee is that there will always be more setups tomorrow, so never be in a hurry to risk your trading capital today.

Placing Your Stop Loss

Using confirming price action on a retest also provides you with a great place to “hide” your stop loss. As you may well know, you always want to place your stop loss at a level where the setup is invalidated if hit.

Waiting for confirming price action gives you the perfect opportunity to do just that. When a bullish or bearish pin bar forms on a retest, you can use the tail of the pin bar as your invalidation level. In other words, if the market moves past the tail the setup is no longer valid.

Let’s take a look at an example of a breakout and retest that occurred on the EURAUD daily time frame. The chart below showsthe pattern in focus.

As you can see from the chart above, we havea wedge pattern that formed on the daily chart over the course of several months. There were three touches on both support and resistance which gives us a tradable pattern.

Also, notice the bearish pin bar that formed after retesting former wedge support as new resistance. Let’s move in and take a closer look to see where we could have placed our stop loss for this setup.

The chart above shows the complete picture. Notice how the bearish pin bar gave us a place to hide our stop loss. Without the tail of this pin bar, it would have been difficult to determinean appropriate level atwhich to place our stop.

Also, note how the 50% entry gave us a much more favorable risk to reward ratio rather than waiting for theprice to break beyond the nose of the pin bar. All in all, this made for a textbook price action setup.

Waiting Teaches Patience

From a non-technical perspective, the practice of waiting for a retest teaches you patience as a Forex trader. It does this by forcing you to wait for a favorable entry rather than simply entering at the first available opportunity.

If you get yourself in the habit of always waiting for the retest, it will soon become second nature. As it becomes second nature you will begin to find that you are less anxious about what the market might do and more focused on what the market is doing.

Patienceis arguablythe most important qualityyou can have as a Forex trader and one that will surely have a positive impact on your trading. And teaching yourself to always wait for a retest is a great way to develop that quality.

Final Words

Whether you are trading a key horizontal level, wedge pattern or channel, it’s important to always wait for a retest of the broken level. This involves waiting for the retest as well as confirming price action before putting any capital at risk.

By waiting for a retest you are essentially waiting for any weak hands to exit the market before putting on a position. This provides you with a stronger foundation from which to buy or sell which leads to a greater probability of a successful outcome.

Above all else, waiting for the market to produce a favorable setup will teach you patience. This alone will have a huge impact on your trading and will put you one step closer to becoming consistently profitable.

Your Turn

Do you currently wait for a retest when trading breakouts?

Leave your comment, question or general feedback below.

Waiting For A Retest Will Make You A Better Forex Trader (2024)

FAQs

Should I wait for the retest forex? ›

Price action may not always be predictable enough and fail to retrace as expected. Such events are known as false breakouts. A premature decision could result in a losing trade, which is why waiting for a retest to validate itself is key.

Why is retest important in trading? ›

A successful retest is seen as confirmation that the breakout is genuine and not a false breakout. Trendlines: Trendlines are also a useful tool for confirming breakouts. Traders may draw trendlines connecting the high and low points of the price action, and look for a breakout that occurs above or below the trendline.

Is break and retest a good strategy? ›

Veteran traders revere the break and retest strategy for helping them identify entry and exit points for trading an asset. It works on the idea that local price levels, once breached, can serve as critical indicators of where the price is headed.

What makes you a better forex trader? ›

The best traders hone their skills through practice and discipline. They also perform self-analysis to see what drives their trades and learn how to keep fear and greed out of the equation. These are the skills any forex trader should practice.

How to trade forex without losing? ›

  1. Do Your Homework.
  2. Find a Reputable Broker.
  3. Use a Practice Account.
  4. Keep Charts Clean.
  5. Protect Your Trading Account.
  6. Start Small When Going Live.
  7. Use Reasonable Leverage.
  8. Keep Good Records.

How long does it take a forex trader to be successful? ›

Given these factors, some currency traders achieve consistent profitability within a few months, while others may take years. The key is to focus on continuous learning, adapting to market changes, and staying patient and disciplined throughout your trading journey.

What is a retest strategy? ›

A retest in forex trading is the price action that occurs after a breakout, where the price returns to the level that was broken and tests it as a new support or resistance level.

How to avoid breakout failure? ›

The best way to be sure you don't get caught in a false-breakout from a trading range is to simply wait for price to close outside of the range for two days or more. If this happens, there's a good chance the range is finished and price is then going to start trending again.

Should you always wait for a retest? ›

The safest method trading the sideways range is it to wait for a confirmed breakout and then enter on the retest. The retest often has the goal to shakeout all the early breakout traders who have moved their stops too soon to break even.

How to do well on a retest? ›

Understand what led you to fail.

Take the time to understand why you didn't perform well. Incorporate the notes you took in step 1 after failing the exam and look for correlations. In order to fix your mistakes and succeed on the next test you need to understand exactly what you did wrong the first time.

What is the 5 minute breakout strategy? ›

A 5-minute Opening Range Breakout (ORB) trading strategy is a day trading approach that involves buying or selling a security when its price breaks above or below the highest or lowest price within the first 5 minutes of the trading day.

What is the biggest secret in forex trading? ›

Opening and closing orders should just be treated as an execution that is always performed without any emotion. All of your trades should open according to your system and analysis conducted beforehand, this is one of the most important Forex trading secrets.

What is the secret to successful forex trading? ›

Education is Key: Successful Forex traders invest in their education. They learn the fundamentals of Forex trading, technical and fundamental analysis, and continuously update their knowledge. Effective Risk Management: Protecting your capital is paramount.

How do you win forex consistently? ›

Forex Trading Conclusion
  1. Pay attention to pivot levels.
  2. Trade with an edge.
  3. Preserve your trading capital.
  4. Simplify your market analysis.
  5. Place stops at genuinely reasonable levels.

When should you stay away from the forex market? ›

Erratic Periods.

This is a good time to stay out of the market. If you can't understand why price is behaving in a certain way, it is usually due to some unscheduled news that has been released or leaked. That is bad news because the market will be unsure as to how to react.

How long should I hold a forex trade? ›

Common Forex Trading Time Frames

Day Trading (1-hour to 4-hours): Day traders hold their positions for a day or less, closing them before the market closes. Swing Trading (4-hours to daily): Swing traders hold their positions for a few days to weeks, aiming to capture larger price movements.

Do breakouts always retest? ›

The reason is that not every breakout sees prices return to retest the break level. Some retests may retrace only a portion of the breakout move, stopping short of retesting the exact break level, which is typically a good sign that the break is for real and will continue.

When should you exit a forex trade? ›

If the prices continue rising, it tells you that the demand exceeds supply, which means the market is considered bullish. It is the perfect time for you to exit the trade by selling out the existing currency pair at a higher price since there are buyers seeking to get a hold of them.

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