Risk Management Basics | Retest Trading 💡
Updated: Feb 3
Being breakout traders we have two options for trade entries:
when the breakout is confirmed we can either open a trading position aggressively once the candle closes above/below the structure or we can be conservative and wait for a retest of the broken structure first.
What is peculiar about the second option is the fact that the majority of pro traders prefer the retest entries. In this article, we will discuss the pros and cons of retest trading.
✔️First, let's discuss whether the retest is guaranteed. NO. How often do we see that? Around 50-55% of the time. Does it mean that 45-50% of breakout trades will be missed? YES.
The main disadvantage of retest trading is that a lot of trading opportunities will be missed. Occasionally the breakout triggers a strong market rally not letting the price return back to the broken structure.
So what is the point to wait for a retest then? Why let the market go without us in case if there is no retest?
✔️Most of the time the breakout candle closes quite far from a broken level. Opening the trading position once the candle closes and setting a stop loss below/above the broken structure, one can get a very big stop loss. Such a big stop that its pip value exceeds or equals the potential return.
🖼️In the picture, I drew a classic channel breakout trade.
The aggressive trader opened a long position as the candle closed above the channel's resistance.
His stop loss is lying below the lower low of the channel.
Analyzing his risk to reward ratio, we can see that his reward equals his risk.
On the right side is the position of the conservative trader.
His stop loss in lying on the same level.
However, instead of opening a trading position on a breakout candle, he decided to wait for a retest of the broken resistance of the channel. Just a slight adjustment of his entry-level gives him a completely different risk to reward ratio.
❗️Patience pays in trading. Missing some trades a retest trader will outperform the aggressive trader in the long run.
Trading is about weighting your potential gains & losses. Paying commissions and swaps for every trade, it is much better for us to trade less but pick the setups that give us a decent potential reward.
What type of trading do you prefer?