Very often, on twitter or forums, I see people posting some simple trading setups, and give them some odd names, then call it their inventions. Laughable indeed. Anyway, kudos to them for providing some amusements.

One of the most commonly seen setup is Immediate retest of broken support/resistance level. Well, regardless of the names given by “traders”, let’s have a look at it a little b it closer.

If I really wanna trade the immediate retest, there are three conditions I wanna see before establishing a position:

Strong level

Immediate retest of a level works, when it is against a strong level. It could be a horizontal support and resistance level, or diagonal trend line. A strong support or resistance level is the one that was formed by multiple touches in the inverse direction before it is broken. For example, a strong support is a level that was formed by a broken resistance level where there were multiple resistance points, in other words, multiple swing highs. Vice versa  for strong resistance level.

So, for the first condition, I want to see a break of level which was constituted by at least 3 swing points (or 2 with other confluence factors)

Strong breakout

Secondly, I want to see a strong break of the level. A slow grinding movement is avoided. Often times, it might turn out to be a false breakout. So, a STRONG breakout bar is what I would like to see.

Continuation pattern

A continuation pattern can be as simple as a small consolidation price cluster following a strong breakout. The basic idea is to have Breakout -> Consolidation ->Breakout scenario.

Here are some charts to demonstrate this setup.

So, here is the simple support resistance setup. Of course, this is not a complete trading strategy. Just some tips for you to consider before taking an immediate retest setup. Err… Shall I also name it as Butt Kiss Setup!

 

From the desk of TraderGav.com