What Is a Retest in Trading and How to Use It?

A “retest” in trading describes when the market price revisits a significant level it previously broke through. This technical analysis concept offers insights into potential price movement continuation or reversal. Recognizing and interpreting retests can help traders validate breakout strength and identify higher-probability trading opportunities.

Understanding Retests

A retest involves price returning to a previously established support or resistance level after an initial breakout. When a price level is broken, its role often flips; for instance, former resistance can become new support, and vice-versa. This re-engagement with the broken level provides crucial information about whether the initial breakout was genuine or a “false breakout” (also known as a “fakeout”).

Support levels are price points where buying interest is strong enough to halt or reverse a price decline. Resistance levels are price points where selling pressure is sufficient to stop or turn around a price increase. A retest validates the strength of these levels, indicating if market sentiment has shifted to defend the new boundary. Traders observe how price interacts with this retested level to gauge the conviction behind the original move.

Types of Retests

Retests manifest in several forms, each indicating a specific interaction with a broken price level.

A support retest occurs when price breaks below an established support level, then returns to test this same level, which now acts as resistance. If the price is rejected from this retested level, it signals a continuation of the downward movement.

Conversely, a resistance retest happens when price breaks above a resistance level, then pulls back to retest it from above. In this case, the former resistance often acts as new support. A successful bounce from this retested level suggests the bullish breakout is valid, indicating a likely continuation of the upward trend.

Trendline retests involve price breaking above a downtrend line or below an uptrend line, then returning to touch the broken trendline. For example, if an uptrend line is broken to the downside, price may retest it from below before continuing its downward trajectory. Similarly, a broken downtrend line might be retested from above as new support. This confirms the shift in market directional bias.

Moving average retests occur when price crosses a moving average, then returns to interact with it. If price breaks above a moving average, it might retest it as dynamic support before continuing higher. Conversely, if price breaks below a moving average, it could retest it as dynamic resistance.

Identifying Retests on Charts

Identifying retests on price charts involves observing specific price action and volume cues. Traders look for how price interacts with the significant level after the initial breakout.

When price approaches a retested level, momentum often slows, and candlestick patterns might become smaller, indicating indecision. Wicks extending from candlesticks at the retest level, especially those pointing away from the breakout direction, can signal rejection. For instance, if price retests a broken resistance as new support, long lower wicks suggest buying pressure is stepping in.

Volume analysis provides additional clues during a retest. The initial breakout occurs on increased volume, signifying strong conviction. During the retest, volume decreases, indicating a temporary pullback rather than a reversal. If the retested level holds and price moves back in the direction of the original breakout, volume should ideally increase again, confirming renewed interest.

Common chart patterns frequently accompany retests, offering visual confirmation. Candlestick patterns such as dojis, hammers (for bullish retests), or shooting stars (for bearish retests) at the retested level can indicate rejection. Engulfing patterns, where a candle completely engulfs the previous one, are strong signals of a definitive turn.

Validating Retests for Trading Decisions

Validating a retest is crucial for informed trading decisions, as it confirms the market’s commitment to a broken level’s new status. A retest is successful when price clearly rejects the retested level and continues in the original breakout direction. This clear rejection, often marked by specific candlestick patterns or a strong move away, provides a high-probability signal.

Once a retest is validated, it can serve as an opportune entry or exit point for trades. For example, after a bullish breakout and a retest of former resistance as new support, a confirmed bounce can be an entry for a long position. A retest of broken support as new resistance provides a potential entry for a short position. This approach allows traders to join a trend with greater confidence, reducing the risk of entering on an initial false breakout.

Validated retests also play a role in risk management. The retested level often provides a natural boundary for placing stop-loss orders. For a confirmed retest acting as new support, a stop-loss could be placed just below that level, limiting potential losses if the retest fails. For a retest acting as new resistance, a stop-loss could be placed just above it. This structured approach helps align trades with prevailing market trends and can improve the risk-to-reward profile.