What Is a Retest in Trading & How Do You Identify One?

A “retest” is a frequently observed phenomenon in technical analysis, occurring when an asset’s price revisits a previously significant level after breaking through it. This action provides market participants with valuable insights, often serving as a confirmation of a new trend or a potential point of entry for a trade. Understanding retests can enhance a trader’s ability to identify opportunities and manage risk effectively.

Understanding Retests in Technical Analysis

A retest in technical analysis refers to the price of an asset returning to a significant price level that it had previously broken through, which could be a former support, resistance, or trendline. The retest serves to confirm the validity of the initial breakout, suggesting that the shift in market sentiment is genuine rather than a temporary fluctuation.

The occurrence of retests is deeply rooted in market psychology and the continuous interplay of supply and demand. When price breaks a key level, it signals a shift in the balance of power between buyers and sellers. Traders who missed the initial breakout often wait for a pullback to the broken level, viewing it as an opportunity to join the new trend at a more favorable price. This collective behavior creates a natural return to the breached level, effectively testing whether the new equilibrium will hold.

From a trader’s perspective, the primary purpose of a retest is to provide confirmation of a breakout. Without a retest, a breakout might be considered a “false breakout,” where the price temporarily moves beyond a level only to reverse course. A successful retest offers a higher probability entry point, as it validates the strength of the new trend and potentially reduces the risk associated with entering too early. This confirmation allows traders to act with increased confidence.

Key Price Levels for Retests

Retests commonly occur at various predefined price levels, each offering distinct insights into market dynamics. These levels represent areas where significant buying or selling pressure has previously emerged, making them important zones for future price action. Recognizing these specific levels is fundamental to anticipating potential retest scenarios.

One common scenario involves support retests. Support is a price level where buying interest has historically been strong enough to prevent the price from falling further, acting as a price floor. When price breaks below a support level, indicating increased selling pressure, it often returns to retest that same level from below. This former support then acts as new resistance, confirming the strength of the bearish breakout if the price is rejected.

Conversely, resistance retests occur when price breaks above a resistance level. Resistance is a price level where selling interest has historically been strong enough to prevent the price from rising higher, acting as a price ceiling. After a bullish breakout, the price frequently pulls back to retest this newly breached resistance. If the price finds support at this level, the former resistance effectively converts into new support, validating the bullish move.

Trendline retests also provide valuable signals. A trendline connects a series of high or low points, indicating the general direction of price movement. When price breaks a trendline, signaling a potential change in trend, it sometimes retraces back to the broken trendline before continuing in the new direction. This retest of the trendline can confirm the shift in market bias, offering traders an opportunity to align with the emerging trend.

Recognizing a Valid Retest

Identifying a valid retest involves observing specific characteristics and signals that suggest the broken price level will hold as new support or resistance. Confirmation is crucial to distinguish genuine retests from false moves. Analyzing price action at the retested level provides important clues regarding its legitimacy.

One primary indicator of a valid retest is the formation of specific candlestick patterns at the retested level. Rejection candles, such as pin bars or engulfing patterns, signal a strong rejection of the retested level. For instance, a bullish engulfing pattern at a retested support level suggests buyers are stepping in decisively, pushing prices higher.

Volume analysis also plays a significant role in confirming a retest. Typically, the initial breakout should occur on higher-than-average volume, indicating strong market interest. During the subsequent pullback to the retest level, volume often decreases, signaling a lack of strong opposing pressure. A valid retest is frequently characterized by an increase in volume as the price moves away from the retested level, confirming renewed buying or selling interest in the direction of the breakout.

The nature of the “touch” at the retest level is another important consideration. Ideally, the price should touch or slightly penetrate the level before reversing, rather than cutting through it significantly. A clean rejection of the level, perhaps with long wicks indicating price rejection, suggests that the level is acting as a strong barrier. If the price penetrates the level too deeply or closes back within the original range, it may indicate a false breakout or a failed retest.

Integrating Retests into Trading Strategies

Integrating retests into trading strategies offers a structured approach to market participation, providing clearer guidelines for entries and risk management. This strategic application helps traders capitalize on confirmed price movements. Retests are commonly used to pinpoint opportune moments for initiating a trade.

Traders often use a confirmed retest as a lower-risk entry point. Instead of entering immediately after a breakout, they wait for the price to pull back to the broken level and show signs of rejection. This patience allows for increased confidence in the trade’s direction, as the market has effectively validated the new support or resistance. An entry might be placed after a confirming candlestick pattern forms at the retested level.

Stop-loss placement is also directly influenced by the retested level. A stop-loss order is typically placed just beyond the retested level. For a retested support (which was former resistance), the stop-loss would be placed slightly below that level. Conversely, for a retested resistance (which was former support), the stop-loss would be placed slightly above it. This placement ensures that if the price breaks back through the retested level, the original trade idea is invalidated, and potential losses are managed.

Profit targets can be set using various methods following a successful retest. Traders might project targets based on previous price action, such as prior swing highs or lows, or utilize technical tools like Fibonacci extensions. The confirmed retest provides a clearer foundation from which to anticipate future price movement, aiding in the establishment of realistic profit objectives. Retests are often combined with other technical analysis tools, such as momentum indicators or chart patterns, to build a stronger case for a trade, reinforcing the overall strategy.