Retest Fail as the multi-faceted rebound setup
The significance of any trading entry technique dramatically depends on the market environment or its context. Previously we talked about the “Shoulder” as a confirmation signal in a rebound setup.
To get the most out of rebound setups along with the “shoulders”, let’s look at the ways to identify the appropriate market environment and some other high probability setups that encompass the “shoulders” in them. Read on to get well equipped to trade with an edge!
Macro Retest Fail – be on the right side of the market
The best trading opportunities often arise in the trend market environment, especially at the beginning of a trend. Let’s learn how to identify the possible start of a new trend in the chart below.
In the chart above, we can see the market transition from the uptrend to the downtrend. The market tested the 3390-3400 area at least twice, before it reversed, and sharply tumbled down.
After the second test, many sources would commonly name such pattern as a “double top”. We call this pattern “Macro Retest fail”, and the difference lies not only in the name but in the way the pattern forms. In the Macro Retest fail we’re looking for the signs of the disruption of the previous trend’s structure in addition to the retest of the same area twice. The “disruption” manifests in the breaking of the last anchor of the preceding trend.
In the example above the last anchor (the higher low in an uptrend) is located around 3365-3370. The market violated the anchor by briefly crashing below it and retracing back above 3365 (the circled price action around the 3365-3370 price area).
After the market fails to go further below the anchor and instead tested for the second time the previous high, we can look for the entry trigger. Use the Shoulder to time your entry. In the example above, the market formed the Shoulder (the circled price action within 3380-3390) after the second retest of 3390-3400 resistance area.
Make sure you don’t open a trade prematurely before the Shoulder had formed completely. The point when you can judge, that the market has formed the Shoulder, is when the market approaches the down border of the Shoulder, in our example – around 3380.
We call this setup “Macro” Retest fail because it helps us identify the reversal of the primary trend, other words, the trend on a higher timeframe. The Macro retest fail puts all of the proceeding setups in the context of the new trend, increasing our odds of being on the right side of the market.
Minor Retest Fail
We identified the reversal point, and have strong evidence that the new trend has been taking place. The toughest is behind, now let’s find the setups in the context of the already established current trend. We will use the same method but at a smaller scale, in the trend market environment. Look at the trend continuation setup in the chart below.
In the example above, you can see the downtrend, that is making a pullback. The market tested the price area around 3260 (the grey horizontal rectangle), rebounded down, and broke the local low, or the anchor. The market didn’t manage to stay below the anchor and retraced back above, retesting 3260 for the second time. Lastly, three candles formed our entry trigger – the Shoulder.
The market forms the setup at the smaller scale in the context of the already established trend, that’s why we name the setup “Minor” Retest Fail.
Complex Retest Fail
Sometimes trends stall for a while, as contrarian traders try to catch a reversal or close their trend-following trades. Such setups give us enough time to gauge the price action, choose the right moment to enter the market and ride the primary trend.
Below is the example of another Retest Fail, which we name “Complex”. Its complexity lies in the multiple retests of the same price area.
In the chart above, you can see the established downtrend. As the trend pulled back, it retested the area around 3100 (big grey rectangle) multiple times as the small circles show. While retesting the resistance, the market broke the anchors (small grey rectangles) four times before generating the ultimate Shoulder, which is relatively close to the resistance area. The Shoulder offered a potential entry that has a high win-rate and the attractive risk-to-reward ratio.
Usually, Complex Retest Fail looks like a correction on a higher timeframe. Complex RTF is the multiple retests of a resistance area (support area in an uptrend), along with the frequently violated anchors. When you see the Complex Retest Fail, wait for the Shoulder to form and to trade off the resistance area.
If you had simply entered a short trade after the second series of retests when the price broke the previous low, you would likely have been stopped out when the market rose back to test again. This is why it is important to wait for the shoulder for confirmation of your entry and avoid being chopped out when trying to enter off key zones without a price signal.
RTFs and the role of probabilities in trading
Notice that we use Shoulders every time we trade any kind of RTF. Shoulders give us more odds for a trade to be profitable. Keep in mind that trading is a numbers game. Anything can happen, but not everything has the same odds of success. Favourable win-rate and risk-to-reward ratios are critical for the long-term profitability in trading. For this reason, we should look for instances, when the odds are in our favour.
Therefore, we trade off a resistance instead of buying into resistance. We wait for a Shoulder, not just trying to pick a top of a swing near the resistance.
We looked at the three kinds of RTF. The Macro RTF serves two functions – identifies the reversal of the primary trend, making sure you trade on the right side and provides an entry to ride the new trend.
Minor RTF offers trading setups during the established trend. Often you can consistently find the Minor RTFs if you zoom in and look at the chart on a candle-by-candle basis, or go one timeframe lower.
You will most likely spot the Complex RTFs from afar, as the setup takes time to form. Some of the Complex RTF advantages are the sufficient time to identify, multiple entry opportunities, and the visibility from a higher timeframe – thus increased win rate, as more traders can see the pattern and participate in it.
In this article, we looked at the downtrend examples. The same principles apply vice-versa to uptrends.
The “little details” like a violated anchor in RTFs or Shoulder can make all the difference in the stats of your trading, so don’t be tempted to overlook them.