Brake and backtests are pivotal in understanding good Technical Analysis (TA) and understanding the reliability of trends. We know that the longer a trend stays in place, the more reliable it becomes. However, that also means that the longer it stays in place, the more significant the break of that trend becomes when it eventually does happen, and it will eventually happen.
So when you get a break of your trend line, it is a major shift in the sentiment of the market, and often has a very volatile and very aggressive response. So what we’re looking for on the brake and back test is the break of a trend-line that we had been watching and then a backtest of that level.
Resistances and Supports
Previous support will act as resistances. This is a important factor to remember as we delve deeper into trading strategies.
When you break your supporting line, you fall underneath that and you have an initial back test. That back test is going to be one of your opportunities. Now this is a more high risk opportunity because often we can see where trend lines have the price action move below the line and then come back up and recover. So we know that we can dip into that zone of resistance. But what we’re doing here is we’re taking a bet based on volume and other factors that we’re going to break this trend-line support and it is not going to hold and we’re not going to be able to get back into that area. So first opportunity.
Your second entry is a back test of the previous level, and that is where the break and back test comes into play. Often when you break a trend line or any sort of pattern, really, you have a defined area of support and resistance, you will see the price action dip. Below that, you’ll see the market hesitate and want to come up and reconfirm that former support in this case as a new resistance line at that point is your second conservative entry.
So you get an opportunity to enter a short position on the break of your pattern. And you also have another opportunity when you get these back tests, is this back test confirms this area that used to be your support is now going to be our area of resistance. We can expect a lot of further down. We can expect further downside following that test.
And in this case, we see that follow through with the price dropping considerably as time goes on. So why does it work. Well, the trend has been in place for a long time. It’s important and it shows that the market is comfortable when the trend changes. That is a market showing us that it’s shifted from the known to the unknown, and the market does not like unknown and uncertainty.
It represents change, trend change and volatility. And what we’re going to be using is these old support lines and these old trend lines to our advantage by getting these breaks and back tests. So we’re shifting from a known trend line. To unknown fear and capitalizing on that fear using our previous information from our patterns. So the back test is a very excellent and very, very common strategy for entering positions. Watch out for it on pretty much any sort of break, whether it’s a breakout of resistance or a consolidation pattern. Look for these pullbacks and these back tests. They can be very profitable for you. And it’s a very, very easy trading strategy for utilizing trends.