When the price changes direction from a level and goes back to test that level again, that’s retest, as price tests the previous price level again. A retest can occur at different price levels and on different time frames like the hourly chart, daily chart, weekly chart, etc.
For example, if the price breaks a resistance zone on a currency pair can go up and come back to test that resistance zone again. There are situations where retest can test the trendlines, market patterns, channels, etc. But retest occurs mostly on resistance and support zones.
The examples we will show you below will help you identify and trade setups with a retest in the currency markets (forex).
How to identify retest on the forex market
In the 4-hour chart example below, from a technical perspective, we have a resistance zone at 118.888. The resistance zone at this level is a resistance zone created when the price couldn’t able to break the resistance. And it created the resistance, then price broke the resistance and it went up for more than 100 pips.
And we can call that a forex breakout strategy because the resistance was broken. The previous resistance zone now is acting as a support zone.
You can see on the image, that we have marked the candle with an arrow. The arrow marks the candle that closed above the previous resistance level. But the price didn’t go up immediately after the candle was closed as a bullish candle and was closed above the resistance.
We have three bearish (red) candles that have been formed when the bullish candlestick pattern was closed. These three bearish candles have moved the price to the previous resistance level that acts now as a support level.
This movement is called retest, as the price has tested our previous major zone that was broken. After the retest was done, the price didn’t break the previous resistance level (zone) that acts now as a support level (zone). As we mentioned, retest occurs on different price levels, but we can identify them more easily on resistance and support zones.
Now let’s move to the other lesson trading forex with retest.
How to trade retest
We will show you two examples of how to trade when a successful retest occurs. The reason why we will show two examples is that you could have opened a buy order before the successful retest, and we will show you how to trade when you open a buy order before the retest occur, on the first example.
In the second example, we will show you how to trade when the retest is completed.
We explained in the previous example how to identify a retest. And now we’ll continue to show you how to trade it if you would open a buy order before the retest occurs. The “buy order” is the price level where you have entered since the price broke the resistance.
And to trade the breakout level of the resistance, you would open the buy order at the close of the candle. If you open a buy order just above the close of the candlestick, it’s the correct way to trade. You should wait for the close of the candle to trade the break of the resistance as the example shows.
But in this example, we have the retest, and since you wouldn’t know if the support zone will break or not, you need to place a stop loss. The stop loss on this example should be placed below the support zone. We have drawn a white short line, so you can see where to place the stop loss.
The price has tested the support zone but couldn’t break the support and the stop loss below the support zone wasn’t executed. And your buy order would be still valid since the forex market has reached the entry price of buy order again and the price has moved above the entry price.
The second example will show you how to trade the foreign exchange market if the retest doesn’t change the previous direction. Before the retest occurred, the price was moving up, but then moved down for some pips. The retest wasn’t able to break the support and a bullish (green) candle was closed just above the support zone.
If you would have not entered this trade example, then you could place a buy order just above the close of the bullish candle as the image example shows. The retest confirms our technical analysis that a buy order in the forex trading market is still valid. And the stop loss should be placed just below the strong support zone, as the retest sometimes can occur more than 1 time.
The examples we give on our blog are based on our technical analysis. But you as a trader should always trade according to your technical analysis.