Introduction
While buying a breakout as it happens can be exciting, it is often a high-risk strategy that leads to significant losses. Professional traders frequently prefer "buying the retest," a method where you wait for the price to break resistance and then return to confirm that level as new support. This confirmation, known as a Support and Resistance (SR) flip, provides a higher-confidence entry point. However, a retest is not a guaranteed win. This lesson explores the nuances of why retests succeed or fail and how to use broader market signals to protect your capital.
The Mechanics of "Buying the Retest"
Buying the retest occurs when the price breaks through a trend line that previously acted as resistance. Instead of chasing the initial spike, you wait for the price to retrace back to that trend line. If buyers step in at this level, it confirms the SR flip. This approach offers a balanced risk-to-reward ratio, as it allows you to set clear stop-losses just below the new support level.
Why Retests Fail: The "Bull Trap" and "Fakeout"
A retest is only successful if the market conditions support it. A "fakeout" or "bull trap" occurs when the price breaks above a trend line, giving bullish signals, but then fails to hold that level as support. The price falls back underneath the trend line, and the line continues to act as resistance. These failures often occur when the initial breakout was driven by short-term hype rather than sustainable buying pressure.
Warning Signs: Analyzing Volume and Price Structure
There are several clues that a retest might fail.
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Volume: If the initial breakout happens on average or weak volume, it suggests there isn't enough market conviction to sustain the move.
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Price Foundation: A major warning sign is when the price "goes right through" the trend line during the retrace rather than bouncing off it. If the foundation of the bounce is actually below the trend line, the SR flip has not been properly established.
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Lower Highs: If the price attempts to break out a second time but puts in a "lower high" compared to the first attempt, it indicates that selling pressure is increasing and the trend is likely to roll over.
The "Market Weather": The Role of Bitcoin
In the cryptocurrency market, Bitcoin acts as the "weather" for all other altcoins. If Bitcoin is in a bearish move, such as breaking down from a rising wedge or experiencing its own bull trap, buyers will be hesitant to step into altcoin trades. Even the most perfect chart setup can fail if the wider market—led by Bitcoin—is providing bearish signals. Always check Bitcoin's price action before entering a retest trade on an altcoin.
Comparing Successful vs. Failed Retests
A successful retest is characterized by strong volume on the initial breakout, showing that many traders are paying attention. Furthermore, it should occur while Bitcoin is in a bullish runup, providing a supportive environment for buyers to step in. A failed retest, conversely, often aligns with a Bitcoin pullback and weak initial volume, leading to a breakdown where previous support turns back into resistance.
Risk Management and Entry Points
To master this strategy, you must have a predetermined exit plan. If the price action rolls over and fails to confirm the SR flip, you must be prepared to cut your losses. Among the three main breakout entry styles—(A) the initial breakout, (B) the retest, and (C) the break of the swing high—the retest (B) is the most manageable for many. By understanding the external factors like Bitcoin and the internal factors like volume, you can gain a distinct edge and transform the retest into a consistent, effective entry strategy.
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