The Breakout and Retest Strategy

Understanding the Core Principle

The Breakout and Retest strategy is a technical analysis approach based on a simple, powerful principle: instead of impulsively entering a trade the moment a price breaks a key level, you exhibit discipline and wait for the price to return to that level (a “retest”). This retest must then show a confirmation signal before you commit to the trade.

This patience-driven method acts as a powerful filter, helping traders sidestep “false breakouts” (or “fakeouts”) and enter positions backed by stronger, more deliberate price action. It’s a shift from chasing price to letting the price come to you.

Anatomy of a Retest: From Resistance to Support

The magic of the retest lies in a classic market principle: what was once a ceiling becomes the new floor.

• Before the Breakout: A resistance level acts as a barrier, with sellers consistently overpowering buyers at that price.
• The Breakout: A surge of buying pressure, confirmed by high volume, finally pushes the price through the resistance.
• The Retest: The price pulls back to this old resistance level. Now, traders who missed the breakout see this as a buying opportunity. The psychology has flipped: the old “ceiling” is now perceived as a solid “floor” or support.

The 5-Step Execution Plan

1. 1. Identify a Consolidation Zone 🔍 Find a stock where price is “coiling” in a predictable range. This indicates a state of equilibrium between buyers and sellers, often preceding a powerful directional move. Look for clear horizontal levels, wedges, flags, or pennants.
2. 2. Wait for a High-Volume Breakout 📈 Price must close decisively above resistance (or below support). A significant spike in trading volume on the breakout candle is your first piece of evidence that institutions are behind the move, lending it credibility.
3. 3. Patiently Await the Retest ↩️ This is where most amateur traders fail. Do not chase the initial breakout. Instead, let the price pull back to the level it just broke. This pullback shakes out weak hands and confirms the level’s new role.
4. 4. Enter on Confirmation ✅ As the price touches the old breakout level, look for a clear signal that buyers are stepping back in. This is your trigger. Ideal signals include a bullish candlestick pattern (hammer, engulfing candle, pin bar) or a bounce off a key moving average (like the 20 EMA).
5. 5. Manage the Trade with a Plan 🎯 A trade is incomplete without risk management. Immediately define your stop-loss and profit target to ensure you have a favorable risk-to-reward ratio.

Mastering Stop-Loss & Profit Targets

Knowing where to get in is only half the battle. Knowing where to get out—for a small loss or a good profit—is what separates professionals from amateurs.

Placing Your Stop-Loss (The Safety Net 🥅)

Your stop-loss is your pre-defined exit point if the trade goes against you. For a breakout and retest, the placement is logical and clear.

• For a Bullish Breakout (Long Trade): Place your stop-loss just below the low of the retest confirmation candle, or slightly below the breakout level itself.
• The Logic: If the price falls back below this critical level, the entire breakout thesis is invalidated. It signals that sellers have regained control, and it’s time to exit with a small, manageable loss.

Setting Your Profit Target (The Goal 🎯)

Your profit target should offer a reward that is at least 1.5 to 2 times your potential risk (e.g., a 1:2 Risk/Reward ratio). Here are three common methods:

1. The Measured Move

This is the most common method. Measure the height of the consolidation range before the breakout and project that distance upward from the breakout level. For a range of ₹100, your target would be ₹100 above the breakout point.

2. Previous Swing Highs/Lows

Look to the left on your chart. The next significant area of resistance (for a long trade) or support (for a short trade) makes a logical target, as the price is likely to pause or reverse there.

3. Fibonacci Extensions

For more advanced analysis, use the Fibonacci tool. The 1.272 and 1.618 extension levels, drawn from the consolidation range, are popular targets for breakout moves.

Supercharging Your Accuracy

A good setup is great, but a great setup has multiple factors aligning in its favor. This is called “confluence.” Here are three ways to add confluence and drastically improve the accuracy of your breakout trades.