Retesting is a common term used in the forex market that refers to the price action of a currency pair testing a key level of support or resistance after a breakout. Retesting is an important aspect of technical analysis as it helps traders identify potential trading opportunities and manage their risk.
When a currency pair breaks through a key level of support or resistance, it is called a breakout. A breakout can occur in any direction, either upwards or downwards, and signifies a significant shift in market sentiment. Traders often look for breakouts as they can provide opportunities for profits.
However, a breakout does not always mean that the price will continue in the direction of the breakout. In fact, it is quite common for the price to retest the level of support or resistance that was broken before continuing in the direction of the breakout. This is where the concept of retesting comes into play.
Retesting is the process of the price action returning to the level of support or resistance that was broken, testing it again, and potentially bouncing off of it. A retest can provide traders with an opportunity to enter a trade in the direction of the breakout, with a higher probability of success.
For example, suppose the price of the EUR/USD currency pair breaks through a key level of resistance at 1.2000. Traders who are bullish on the EUR/USD may look for a retest of that level before entering a long position. If the price does retest 1.2000 and bounces off of it, it provides traders with a potential entry point with a lower risk than entering at the breakout point.
On the other hand, if the price breaks through a key level of support, traders who are bearish on the currency pair may look for a retest of that level before entering a short position. If the price does retest the support level and fails to break back above it, it provides traders with a potential entry point with a lower risk than entering at the breakout point.
Retesting is not always a guarantee of success, and traders should use other indicators and analysis to confirm their trades. However, it is a valuable tool for traders to use to manage their risk and potentially increase their profits.
Traders should also be aware that a failed retest can signal a potential reversal in the direction of the breakout. If the price action fails to retest the level of support or resistance that was broken, it may indicate that the breakout was a false signal and that the price will reverse direction.
In conclusion, retesting is an important aspect of technical analysis in the forex market. It helps traders identify potential trading opportunities and manage their risk. Traders should use retesting in conjunction with other indicators and analysis to confirm their trades and be aware of the potential for failed retests to signal a reversal in the direction of the breakout.
