Strategy Library

Price action

Break and retest

When price closes through a support or resistance level, the old level often changes role: broken resistance acts as support and broken support as resistance. You wait for price to come back to the broken level and trade in the direction of the break once the level holds.

BeginnerAny liquid market: forex, indices, gold, cryptoAny sessionM15, H1, H4
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Example 01

Break and retest on a chart

GBPUSD · H1Retest heldbreak, retest, continue

Zone: 1.2744 to 1.2757Entry: 1.2769Stop: 1.2741Target: 1.2825 (2R)Sample candles, not market data

The rules

Setup
  • Mark a support or resistance level price has turned from at least twice
  • Treat the level as a zone of prices, not one exact price
Entry
  • A candle closes beyond the level, not just a wick through it
  • Price comes back to the broken level within a few candles
  • A rejection candle forms at the level (pin bar, engulfing or similar)
  • Enter on a stop order just beyond the rejection candle, in the direction of the break
Stop
  • Beyond the rejection candle and the broken level
Target
  • The next support or resistance level, or a fixed 2R, or the height of the range before the break measured from the level
Manage
  • Close the trade if a candle closes back through the level

Common mistakes

  • Calling a wick a break. A wick through the level that closes back inside is not a break.
  • Expecting every break to retest. Many breaks never come back. Chasing them breaks the strategy.
  • Drawing levels as exact prices. Levels are zones. One exact price gets pierced by a few pips and looks broken.
  • Trading against the bigger trend. A retest against the higher timeframe trend gives the level less to hold it.

When it's off

  • Skip it if price closes back through the level on the retest
  • Skip it if price chops sideways at the level for a long time
  • Skip it if price never comes back to the level (do not chase)

Words to know

Support and resistance
Zones, not single prices, where buyers (support) or sellers (resistance) have shown up before. A level is broken when a candle closes beyond it, and a broken level is often watched from the other side.
Breakout
Price moves through a support, resistance or range edge and a candle body closes beyond it. A wick beyond that closes back inside is a sweep, not a breakout.
Break and retest
A breakout is a candle body closing beyond a level such as a swing or range edge; the retest is price coming back to that level and holding it from the other side, so old resistance acts as support (or the reverse). A wick beyond that closes back inside is a sweep, not a breakout.
False breakout
Price breaks beyond a level but cannot stay there and comes back inside, trapping breakout traders. It is only known after the return, never at the breakout candle's close.
Pin bar
A candle with a small body at one end and a long wick on the other, showing price was pushed one way and rejected. A hammer is the bullish version after a fall, a shooting star the bearish version after a rise, and it only counts once the candle has closed.
Engulfing candle
A two-candle pattern where the second candle's body covers the first candle's body in the opposite direction: bullish engulfing after a fall, bearish after a rise. On 24-hour markets the gap that stock-chart definitions mention rarely applies.
Role reversal
A broken level switching from support to resistance, or the other way round.
Measured move
A target projected from the height of the range before the break.

When you make it yours, I'll ask what the rules above leave open. Start with one of these:

  • What counts as a valid break for you: a candle close beyond the level or a wick, on which timeframe, and by how much?
  • How do you pick the level: how many touches, and on which timeframe?
  • How deep or how long can the retest be before you call the setup off?
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From DT Academy

What testing exists

Research on currency markets found that published support and resistance levels helped predict where intraday trends paused. That supports the idea of levels, not any one retest rule.

Before you trust a backtest

  • Many professional traders risk under 1% of their account on one trade idea, and the common guideline is 1 to 2%.
  • The more versions of a rule you try on the same data, the more likely a good backtest is luck. Decide your rules before you test.
  • Include spread and commission, and practice on dates you have not looked at, before you trust a result.

Sources