Price broke resistance at 100, closed at 103 and came back to 100. What is 100 most likely to be now?

Support: the level has switched roles. Broken resistance often turns into support. That’s the retest that gives an entry with a close stop.

A candle’s wick went above the 100 level to 101.6, but it closed at 99.5. What is it?

A false breakout: the close came back under the level. A close confirms a breakout. A wick beyond the level with a close inside is a classic stop hunt.

Entry 50, stop 49, target 53. What’s the risk-to-reward?

1 to 3. Risk 50 − 49 = 1, reward 53 − 50 = 3. So 1 to 3.

Breakout, retest and role flip

Lesson 6 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.

A level switches roles

When resistance gets broken it often becomes support, and the other way round. The reason is people: those who sold at the level are now losing and happy to get out at break-even, and those who missed the breakout are waiting for a pullback. It’s one of the most reliable ideas in technical analysis; Murphy covers it separately.

The false breakout trap

Above an obvious level there are always stops and breakout orders. Big players profit from pushing price there briefly, grabbing that liquidity and bringing it back. On the chart it’s a long wick beyond the level and a close inside. That’s why only a candle close beyond the level confirms a breakout, ideally on big volume.

The retest: entering without chasing

Buying right on the breakout candle means chasing price with the stop far below. It’s calmer to wait for the retest: price comes back to the broken level, it holds, and a confirming candle shows up. Then the stop is close, beyond the zone, and the target is at the next level. A retest doesn’t always come, and that’s fine: a missed trade beats a bad one.

Stop, target and the maths

Before entering there are always three prices: entry, stop and target. Distance to target divided by distance to stop is the risk-to-reward ratio. Many pros only take trades of 1 to 2 and better. At 1 to 3 even 3 winners out of 10 come out ahead. So levels aren’t only for entries, they let you honestly check whether a trade is worth the risk.

Check yourself

Price broke resistance at 100, closed at 103 and came back to 100. What is 100 most likely to be now?
Correct answer: Support: the level has switched roles. Broken resistance often turns into support. That’s the retest that gives an entry with a close stop.
A candle’s wick went above the 100 level to 101.6, but it closed at 99.5. What is it?
Correct answer: A false breakout: the close came back under the level. A close confirms a breakout. A wick beyond the level with a close inside is a classic stop hunt.
Entry 50, stop 49, target 53. What’s the risk-to-reward?
Correct answer: 1 to 3. Risk 50 − 49 = 1, reward 53 − 50 = 3. So 1 to 3.

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