Breakouts and Retests

First Officer · C02: Price Action · About 25–30 minutes

Safety rule: A candle formation cannot guarantee a market move. Define the cash loss before interpreting upside.

Your mission today

By the end you can define a breakout and retest using fixed boundaries and completed bars.

Before you start

Use the completed C01 market-structure lessons, a demo price chart and a calculator. Mark reference levels before replay. Every number is imaginary.

1. Understand the pattern

Imagine a crowd leaving a fenced garden. One person stepping across the gate is not proof everyone has moved out. A breakout is a price move beyond a previously defined range under a chosen confirmation rule. A retest is a later revisit of that area. Either may fail.

A breakout occurs when price moves beyond a previously defined boundary; a successful continuation occurs only if subsequent prices accept the new region. A retest may offer a more controlled location than chasing the breakout candle, but strong breaks sometimes never retest. There is no free entry that guarantees both fill and continuation.

2. Worked example: what could be lost?

An imaginary market ranges from 95 to 100. It closes at 101.20 and later revisits 100.10. A proposed long at 100.40 with a stop at 98.80 has 1.60 points of risk. At $10 per point, that is −$16 before fees. A move toward 104 would be +$36 gross, but the boundary might fail instead.

Original Black Box Journey teaching schematic. Imaginary prices and outcomes only.

3. Read the full context

Mark the original high and low before any break. Decide whether confirmation needs a complete candle close beyond the area and how far. Set a maximum permitted chase distance. On the retest, require the exact closed-bar behaviour you have written, not any wick touching the old level.

Technical detail: Specify the range boundaries before the break, the required close beyond them, a maximum chase distance and a retest acceptance rule. A valid breakout setup also needs a time limit and a failure condition: prices returning sustainably inside the old range may invalidate the idea. All these rules must be knowable when the signal forms.

4. Watch for the failure case

A breakout candle can become an exhausted move directly into the next resistance. A retest may not occur, so no trade is a valid outcome. Never redraw the original boundary to manufacture a successful case.

Chasing a long breakout candle can create an entry directly into the next resistance. Counting every wick above the boundary as a confirmed breakout inflates historical opportunity counts.

5. Practise a reproducible decision

In a 20-event replay, classify unconfirmed probes, completed breaks, accepted retests and failures. Record exact times, possible stop distance and skipped events.

For comparison, the original source's example illustrates: An educational synthetic chart ranges from 95 to 100, closes at 101.20, retests 100.10 and then moves toward 104. The trader waits for a closed retest candle rather than assuming every touch of 100 is support. With an invalidation at 98.80 and entry at 100.40, the initial risk is 1.60 per unit before costs.

6. Keep the breakout and the retest as separate events

Synthetic EURUSD scenario: A completed H1 boundary sits at 1.08600. An M15 candle closes at 1.08620, above the level. That may count as a breakout under your written rule. The next candle falls to 1.08590 and closes at 1.08610. That is a possible retest because price revisited the old level; it is not proof that resistance has become support. If your rule needs a second close above the boundary, the required condition is now observable.

Risk comes first. Imagine a hypothetical long entered at Ask 1.08625 with a planned Bid stop at 1.08535. The 9-pip planned price risk is −$9 at an invented $1 per pip before costs. A later Bid at 1.08715 would offer +9 pips in a separate imaginary path. Another completed close below 1.08600 could instead undermine the setup.

Practice record: On ten replay segments, capture the initial boundary timestamp, breakout closing price, lowest retest price and the first confirmed retest close. Label each case BREAK, RETEST, FAILED RETEST or NO TRADE using fixed rules. Do not assume a wick touch qualifies as a held retest.

Common mistake

A pattern name alone cannot approve an order. Always require a premarked reference, an exact confirmation rule, a structural failure level and a feasible cash-risk calculation.

Plain-English glossary

• Breakout: A defined confirmed move beyond a prior boundary.
• Retest: A later price revisit of a previous area.
• Acceptance: A chosen observation showing price holding beyond a level.
• Chase distance: Maximum distance from the boundary permitted by a plan.

Try it yourself

In a 20-event replay, classify unconfirmed probes, completed breaks, accepted retests and failures. Record exact times, possible stop distance and skipped events. Save every eligible and skipped candidate at the decision timestamp.

What you can now do

• Define a breakout and retest using fixed boundaries and completed bars.
• State a concrete observation that would disqualify the idea.
• Calculate the loss from the proposed entry and stop.

Next lesson

C02.4 · False Breakouts and Trapped Traders. Carry forward the same strict confirmation standard.