It can be frustrating to watch a breakout play out while you’re sitting on the sidelines. That urge to jump in late and chase green candles is something every trader battles. But you can win that battle if by utilizing a unique trait of the market: backtests.
A backtest is a re-test of the breakout price of a move. Backtests don’t always show up, and they don’t always hold, but when they do, they can offer a far more controlled, lower-risk entry than chasing strength. Here are four useful ways to catch a backtest.
1. Price Levels
Concrete support and resistance levels are the most common backtest zones. These are areas where price has previously stalled or reversed. What’s interesting is how often scalpers to daytraders to swing traders end up watching the same levels.
You might see a fast backtest on the 1-minute time frame turn support right after a breakout, followed by a higher timeframe (e.g. hourly) backtest later in the day. Price tends to respect levels across timeframes.
The best and cleanest backtests often occur after all-time high breakouts. These setups are ideal because there’s no overhead resistance, and the market tends to re-test key levels more methodically. All-time highs offer textbook examples of breakout and backtest structure, and provide a strong market behind it as well.
2. Trendlines
Trendlines are another solid tool to identify potential backtests, although they come with a little more nuance. Unlike fixed price levels, trendlines are drawn subjectively, therefore they often act more as zones than exact levels.
When a trendline break occurs with volume and conviction, a pullback to retest the breakout line (or the zone around it) can be a high-probability entry.
3. Moving Averages
EMAs and SMAs are great for spotting dynamic support and resistance. If a certain EMA (like the 12 period exponential moving average) has been consistently rejecting price, a strong breakout and close above it can lead to a backtest opportunity when price comes back down to retest that same ema as potential support.
When the trend shifts and price starts treating the EMA as support rather than resistance, that’s often your cue.
4. Candle Body Breakout Levels
This one is a best suited to stair-step patterns. If you see a series of candles where none break the low of the previous one, and then a breakdown occurs, mark that breakout candle’s body level.That body low can become a short-term resistance that gets backtested.
It is similar to price action candle, but the level is moving in real time as the stair step pattern establishes itself, and is a trick many experienced traders use when they miss the initial move.
Tips For Managing Backtest Entries
- Backtests work best when they come into clear prior support/resistance zones, not just random wicks.
- Volume gives clues. In an ideal setup, breakout volume should increase to confirm participation, and backtest volume should decrease showing sellers aren’t stepping in aggressively.
- Not every breakout holds. Fakeouts happen. This is why disciplined risk management is crucial when entering a backtest.
- If you don’t have a technical stop level nearby, define your stop by dollar risk. This isn’t ideal, but it can help enforce discipline while managing trades.
- Backtests may not hit levels perfectly so you need to allow for some wiggle room.
Learning to identify backtests is a key part of leveling up your trading. It allows you to stay patient, stick to your plan, and trade with intention instead of emotion.
And remember, sometimes the best trades are the ones you don’t take. Let the setup come to you.
