The Power of Retest: Why You Should Never Chase a Breakout
When it comes to trading and investing, few scenarios are as tempting as a breakout. A stock, currency, or commodity suddenly surges past a key resistance level, and the fear of missing out (FOMO) kicks in. However, seasoned traders know that chasing a breakout is often a recipe for disappointment. Instead, the smart approach is to wait for a retest.
What Is a Breakout?
A breakout occurs when the price of an asset moves beyond a defined support or resistance level, accompanied by increased volume. This movement is often interpreted as a sign of a strong directional shift, prompting many traders to jump in.
Why Chasing Breakouts Is Risky
While breakouts can signal the beginning of a new trend, they are also prone to false signals, known as “fakeouts.” Here’s why chasing a breakout can be problematic:
- Volatility spikes – Prices can move erratically immediately after a breakout, increasing the risk of entering at the wrong time.
- Overbought/oversold conditions – Assets that break out sharply may become overextended, making them susceptible to pullbacks.
- Lack of confirmation – Not all breakouts are created equal. Without additional confirmation, such as a retest, the breakout may not be sustainable.
What Is a Retest?
A retest happens when, after breaking a key level, the price returns to retest that level—now acting as support (after breaking resistance) or resistance (after breaking support). This return offers a second, often safer opportunity to enter with a clearer picture of market conviction.
Why Waiting for a Retest Is Smarter
Waiting for a retest allows traders to:
- Confirm the strength of the breakout by observing how the price reacts to the former resistance/support.
- Improve risk-reward ratios by entering at a better price with tighter stop-loss levels.
- Reduce emotional trading by avoiding the rush and FOMO that often accompany sudden price moves.
Real-World Example
Consider a stock that breaks above $50, a level it has struggled to surpass for months. Many traders buy immediately. However, the price quickly pulls back to $50, now acting as support. Those who waited for this retest can enter with more confidence, knowing that the level has been validated by the market.
Conclusion: Patience Pays
In trading, as in life, patience is a virtue. Never chase a breakout without confirmation. Instead, wait for the retest. This approach not only increases your odds of success but also helps you trade with discipline and control. Remember, the market will always present new opportunities—there’s no need to rush into the first one you see.