21. What is a breakout retest strategy?
This diagram illustrates a several breakout retest scenarios. Notice the horizontal red line connecting the wicks of several candles. That is a resistance line. Beneath that is a green horizontal line. That is a support line.
Between those support and resistance lines the prices are going up and down in a wave form. The prices do not break through the support nor the resistance lines. The are consolidating in such a way as to present several trading opportunities.
Where the red candle breaks through the support line, that is called a breakout. At that point more sellers have entered the market pushing the price down. In the example here, the support line more or less became the resistance for the next consolidation.
It is conceivable that a forex investor could have won a half a dozen trades in a row, lost a few and then won several more in the new consolidation. (Note that the Cash Trap strategy suggests that a person should stop investing for the day once they’ve experience a daily account gain of 8%.)
Sometimes there can be a breakout after a consolidation resulting in an obvious trending market. After about a wave and a half you can identify a trend and ride a few waves. Remember to never risk for than 3% of your account.
When you suspect the trend may be changing, it’s a good idea to reduce that risk to 1% of your account. As seen on the image to the left, a trend often ends after the candles pass through the simple moving average (SMA) in Cash Trap. In the image, you would no longer be in an uptrend.
To reinforce the idea of the above paragraph, consider the image to the left. You can see how the candle broke through the horizontal blue support line. However, it retested at the SMA; it did not make it to the old support line.
One website says that breakout retest trading is about as simple a trading strategy as you can get. You should read that page now.
Confirmation candle at a breakout point
While you are looking for breakouts and retests, you may see something called a confirmation candle. Accompanied by the correct indicators, a green confirmation candle will suggest an up trend and a red confirmation would suggest a down trend.
Look at this USDJPY candle chart. The red horizontal line is a line of resistance at point R. At point S that same red line has more or less become a support line. The second green candle at S looks like a confirmation candle. It suggests that the market is trending upwards.
Note that at point C the wick has retraced back through the (now) support line. I would make a call trade there because of the high probability that this will become an upward trending market.
Confirmation with Stochastic/RSI
At point A there is a green support line. At point A a red candle goes down through the support line. This is followed by a red confirmation candle. If you follow the black line straight down to B, that is the point where the Stoch/RSI goes through the 40% line.
Here is spends a significant amount of time below the 40% line. Then it goes up to to D at the 50% line. The black line goes straight up to C where there is a retest. That would be a good point to make a put trade.
The Stoch/RSI is a measure of momentum in the marketplace. If the line is above the 50% line, there is upward momentum and the market could be uptrending. If the line is below the 50% line, there is downward momentum and the market could be downtrending.
If you are on Trading View, you can look at any currency pair and any corresponding indicator you need to help you make a trade.
The link above should have taught you how to set up a candle chart for any currency pair you’d like. If you go to this FAQ, you will see how to add an indicator to the bottom of any candle chart.
The divergence indicator here shows momentum. In this example you could have opened up a divergence indicator fairly quickly after you see the second red candle starting to form. Then you would have seen that the currency pair was losing momentum.
Look at the numbers on the right-hand side. The key entry points are 40% and 60%. Where I’ve typed 60% on the indicator would be a good point to make a put. As you can see by following the dotted line up to the candle chart, you could have made lots of money by starting to make several put trade starting at the 60% line.
Practice, practice, practice
If you have Trading View, you should go there as soon as you have time. Practice things you have seen on this web page.