The Pivot Breakout & Retest Strategy is a popular trading approach that uses pivot points to identify key levels of support and resistance in the market. The strategy is based on two key price actions: breakouts and retests. A breakout occurs when the price moves beyond a key pivot point level, and a retest happens when the price comes back to that level after the breakout, providing an opportunity to confirm the breakout and enter a trade.

This strategy is ideal for traders who prefer to trade trending markets and want to capitalize on breakout moves with confirmation via the retest. It provides a structured approach to trading, as traders can use pivot points to set entry, stop-loss, and take-profit levels, while waiting for the price action to retest key levels before entering a trade.

What is the Pivot Breakout & Retest Strategy?

The Pivot Breakout & Retest Strategy uses pivot points to determine key price levels where breakouts are likely to occur. Once a breakout occurs, the price typically retraces to the breakout level (the pivot point), and a retest of that level confirms whether the breakout is genuine or a false signal.

Pivot points represent potential support and resistance levels, and breakouts above resistance or below support often signal strong market momentum. The strategy aims to take advantage of these breakouts by waiting for the price to retrace and confirm the breakout before entering a trade. This confirmation reduces the risk of false breakouts and increases the probability of successful trades.

How Does the Pivot Breakout & Retest Strategy Work?

The strategy is executed in the following steps:

1. Calculate Pivot Points:

The first step is calculating the pivot points, which are typically derived from the previous day’s high, low, and close prices. The main pivot point (P) and key support (S1, S2) and resistance (R1, R2) levels are calculated as follows:

• Pivot Point (P) = (High + Low + Close) / 3
• Resistance 1 (R1) = (2 * P) – Low
• Support 1 (S1) = (2 * P) – High
• Resistance 2 (R2) = P + (High – Low)
• Support 2 (S2) = P – (High – Low)

These levels serve as critical points for identifying potential breakouts or retests during the trading day.

2. Identifying Breakout Points:

A breakout occurs when the price moves beyond a significant pivot point level, such as resistance (R1 or R2) or support (S1 or S2). The breakout is typically confirmed when:

• The price breaks above a resistance level (indicating a bullish breakout) or below a support level (indicating a bearish breakout).
• The breakout is accompanied by an increase in volume, suggesting strong market participation and confirming the breakout’s strength.

3. Wait for Retest of the Breakout Level:

After the breakout, the price often retraces (or “retests”) the level that was previously broken. The price may revisit the breakout level (either support or resistance) and test it to confirm whether the breakout is legitimate or if it was a false move.

• Bullish Scenario: After a breakout above resistance (R1 or R2), the price retraces back to the breakout level. If the price holds the breakout level as support and bounces, it confirms the bullish trend, and traders can enter a long (buy) position.
• Bearish Scenario: After a breakout below support (S1 or S2), the price retraces back to the breakout level. If the price holds the breakout level as resistance and rejects it, it confirms the bearish trend, and traders can enter a short (sell) position.

4. Confirm the Retest with Technical Indicators:

To increase the likelihood of a successful trade, traders often use technical indicators to confirm the retest. Some useful indicators include:

• Moving Averages (MA): A price retracement to a moving average (such as the 50-period or 200-period MA) that aligns with the breakout level can provide additional confirmation.
• RSI (Relative Strength Index): If the RSI shows oversold or overbought conditions when the price retests a breakout level, it can confirm the continuation of the breakout.
• MACD (Moving Average Convergence Divergence): The MACD can help identify momentum shifts and potential reversals during the retest phase.

5. Enter the Trade:

After confirming the retest and validating the breakout, traders can enter their positions. Depending on the scenario:

• Buy Trade (Long): When the price successfully retests the broken resistance level and bounces, traders enter a long position.
• Sell Trade (Short): When the price successfully retests the broken support level and rejects it, traders enter a short position.

6. Setting Stop-Loss and Take-Profit Levels:

To manage risk and protect profits, traders should set stop-loss orders just beyond the breakout or retest levels. For example:

• For a Long Position: The stop-loss can be placed below the retested resistance level (now acting as support).
• For a Short Position: The stop-loss can be placed above the retested support level (now acting as resistance).

Take-profit targets can be set based on the next pivot level (e.g., the next resistance level in a long trade or the next support level in a short trade).

7. Monitor and Adjust:

Once the trade is open, continuous monitoring is essential. Traders should adjust their stop-loss and take-profit levels as the market moves in their favour. Trailing stops can be used to lock in profits as the price moves away from the breakout level.

Key Advantages of the Pivot Breakout & Retest Strategy

1. Clear Entry and Exit Points: The strategy provides clear, defined levels for entry, stop-loss, and take-profit, making it easy for traders to execute their trades.
2. Confirmation of Breakouts: By waiting for the retest, traders reduce the risk of entering on false breakouts, increasing the accuracy of their trades.
3. Adaptability Across Markets: The strategy can be applied to various asset classes (stocks, forex, commodities, cryptocurrencies) and timeframes, making it versatile.
4. Risk Management: The strategy incorporates effective risk management by using stop-loss and take-profit orders based on pivot points, limiting potential losses while securing profits.

Key Considerations for the Pivot Breakout & Retest Strategy

1. Market Conditions: This strategy works best in trending markets where breakouts and retests are more likely to occur. It may not be as effective in range-bound or sideways markets, where price often moves between support and resistance without breaking out.
2. False Breakouts: Although waiting for a retest helps confirm the breakout, false breakouts can still occur, especially in volatile markets. Traders should look for confirmation from indicators like RSI or MACD to avoid false signals.
3. Timing: The strategy requires patience, as traders need to wait for the price to retest the breakout level. Entering the market too early can lead to missed opportunities or false entries.
4. Volatility: During periods of high volatility, breakouts can quickly turn into false moves. Traders should be cautious and ensure that breakouts are supported by high volume and strong market sentiment.

Pros and Cons of the Pivot Breakout & Retest Strategy

Pros:

1. Increased Trade Accuracy: The retest provides confirmation of a legitimate breakout, reducing the likelihood of entering on false signals.
2. Clear Trade Setup: The strategy provides a structured approach to identify potential trades based on key price levels and pivot points.
3. Versatility: This strategy can be used across multiple markets and timeframes, making it adaptable to different trading styles.
4. Effective Risk Management: Stop-loss and take-profit levels based on pivot points allow for efficient risk control and profit targeting.

Cons:

1. False Breakouts: Despite waiting for a retest, there is still a risk of false breakouts, especially in volatile markets or low-liquidity conditions.
2. Requires Patience: The strategy involves waiting for the retest, which may not always occur, potentially leading to missed opportunities.
3. Not Suitable for Sideways Markets: The strategy works best in trending markets, so it may not be effective when the market is range-bound or moving sideways.
4. Market Noise: In highly volatile markets, price action around key pivot points can become erratic, leading to confusion and false signals.

Conclusion

The Pivot Breakout & Retest Strategy is a highly effective approach for trading breakouts with confirmation. By waiting for the price to retest the breakout level, traders can filter out false breakouts and increase the probability of success. This strategy works well in trending markets and provides clear entry and exit points based on pivot levels.

While the strategy offers many advantages, such as improved trade accuracy and risk management, traders should remain cautious of false breakouts and market noise. With proper risk management and patience, the Pivot Breakout & Retest Strategy can be a powerful tool for capturing profitable trades in various markets.

If you’re interested in learning more about advanced trading strategies like this one, explore our Trading Courses for expert-led guidance and practical trading insights.