[Today's guest post is by @TSXSwingtrader. Julie is a technical swing trader who focuses on chart patterns and trades mostly Canadian stocks on the TSX and TSX-venture.]
There are so many different trading strategies, chart patterns, and indicators that technical traders can employ to buy and sell stocks. These different strategies can be overwhelming at times and it is usually better to focus on a select few trade set-ups that work for each individual trader’s style.
One of my favorite trading patterns is the re-test. I like it because it is easy to spot; levels are clearly defined, it is fairly reliable, and it can often signal an intermediate term trend change. The basic pattern consists of two steps: first, a trend line is broken, and second, that trend line is retested. It’s that simple.
I find the re-test easier to trade than breakouts since the re-test usually takes a few days to a few weeks to develop. This allows me to scan for this setup after trading hours when I’m less prone to the adrenaline rush of an open market. Moreover, it removes the feeling of needing to chase a breakout in order to “not miss out”.
By waiting for the re-test, you can also place your stop just below the low of the pattern and it will be much closer to your entry point than if you had bought the stock while it was breaking out.
It doesn’t matter what the original pattern is. It could be a triangle, diamond, inverse head and shoulders, an all-time high or just a range. So long as a trend is broken and retested, the pattern is valid.
Here is an example of stock that has had two re-tests recently:
In February the stock broke the high from November, climbing nearly 10% in two days. $DDD then re-tested its breakout level. You will notice it actually re-tested the level three times in a little over a week. This would have given you a good risk:reward entry for any potential upward move. Your stop could be placed just below the trend line break.
Then in April, the stock broke above its February high. This breakout did not get re-tested until over a month later in May. Once again, though, this re-test would have given you a good risk/reward entry.
The re-test can also be used for shorting as well. Once again, a trend line is broken, and then re-tested. It is just reversed.
Here is an example:
In this instance, $BPL broke down below the low of February and re-tested the break down in early May. Once again, the originating pattern is irrelevant, so long as a trend line is broken and re-tested.
The above examples use daily charts for illustrative purposes, but this pattern can be used on any timeframe and still be a reliable pattern to trade. Shorter term traders can use a 30-minute chart, while traders who want to hold for longer periods of time can use a weekly chart.
Take a look at the following chart of $SBUX for example:
The stock broke its July high in October and retested the break out five times before finally taking off.
The re-test trade may not be as exciting as catching the breakout on a stock, but it does provide a simple, easily recognized trade setup.
As always, no pattern is foolproof. Every trade involves risk, and proper risk management should always be employed.
What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).