Chapter 4 of 8

Playbook: breakout and retest

Specify a completed-bar range breakout, a qualified retest, bounded entry rules and a test that includes failed breakouts.

4 min read · Strategy research candidate

Rule sheet · Original paper-research candidate

The playbook at a glance

Market conditions: Predefined consolidation followed by a completed-bar upside break; no claim of profitability.
Setup & entry trigger: Previous-20-session high is broken on the close; first qualified retest within 3 sessions; enter the following permitted open.
When the idea fails: Qualified retest low minus a frozen buffer; do not widen after entry.
Position sizing: Budget ÷ (price risk + friction), rounded down; then affordability, whole-lot and portfolio-heat caps.
Exit policy: Initial invalidation, 2R price objective or fifth-session close; freeze the ordering assumptions.
When to skip: No qualified retest, entry gap outside allowance, insufficient cash, excessive spread or a prohibited event window.

These rules are unvalidated research candidates, not a claim of positive expectancy. Parameter choices are illustrative. Test costs, gaps and funding before interpreting a result.

Download the research log template ↓

In this chapter

What this candidate is trying to capture
Freeze an observable setup
Define failure before quantity
Choose one exit policy for the test
What would make the research unconvincing
Worked example
Common mistakes
Check your understanding

What this candidate is trying to capture #

The hypothesis is that a predefined range boundary can become an accepted reference after price breaks out and returns. That is a claim to test, not a property of every chart. The range must be defined before the breakout. A rectangle drawn around whichever historical consolidation led to a rally is hindsight selection.

Use this as a long-side paper-research candidate; the short side needs its own specification. The price series used to generate the signal is the same series used to define entry and invalidation in the worked example. Switching from a spot chart to a leveraged option premium would require a separate exposure model.

Freeze an observable setup #

For an illustrative daily-bar study, define the boundary as the highest high of the previous 20 completed sessions, excluding the signal session. Require the signal close above that boundary. Over the next three completed sessions, look for the first bar whose low reaches the boundary but whose close is above it. If no such bar occurs, cancel the candidate. The 20/3 values are research parameters, not optimised or recommended defaults.

All setup information is available only at the close of its relevant bar. Enter on the next session only if the next opening price is within the predeclared distance allowance. A gap far beyond the setup is a new trade, not the original bargain at a more exciting price.

Define failure before quantity #

Use the qualified retest low minus a declared buffer as the initial price invalidation. Do not widen it merely to keep a larger position alive. Include a conservative per-unit friction allowance in planned risk, round down to whole permitted units, and apply a separate capital/notional cap. A valid chart stop can still imply a position of zero units.

An order intended to exit at invalidation may fill worse during a gap or liquidity failure. That is why the ledger also needs adverse-gap scenarios and settlement funding. Planned stop risk and worst possible loss are not synonyms.

Choose one exit policy for the test #

For this illustrative version, exit on first touch of a 2R price objective, initial invalidation, or the close of the fifth holding session, whichever occurs first. R for the price objective means entry-to-invalidation distance, while account sizing includes friction. Keep those two definitions separate. Do not add an attractive trailing rule only to losing examples.

If a single daily bar touches both target and stop, daily OHLC cannot establish which happened first. Use a finer observable sequence or assume the adverse ordering in this study. Record unfilled orders and skipped gaps, because a backtest that assumes all intended fills can exaggerate the result.

What would make the research unconvincing #

Compare all eligible breakouts, qualified retests and rejected candidates, using a fixed universe and enough varied conditions to inspect regime dependence. Measure cost-adjusted returns and the distribution of failed retests. Test modest neighbouring parameter choices; a single spectacular 20/3 result surrounded by failure suggests fragility.

Do not use a Telegram message, profit screenshot or a successful current stock as substitute evidence. An edge has to survive the specified test. If the expected gain disappears after realistic gaps, costs or chronological evaluation, the useful conclusion may be not to use the candidate.

Hypothetical worked example

A fictional retest, with a capital constraint

A range boundary is 500. A qualified retest has a low of 498. With a 2-point buffer the planned invalidation is 496. A permitted entry at 502 gives 6 price points of risk. Adding an illustrative 1-point friction allowance gives 7 per unit. A ₹1,000 budget permits floor(1,000/7) = 142 cash-market units, subject to affordability.

At 502, 142 units require ₹71,284 before charges. If the available unleveraged allocation is ₹60,000, the affordability cap is 119 units before allowing for purchase charges; the final quantity must be the lower permitted number. A 2R price objective is 514, not a guarantee of that fill.

Common mistakes

Drawing the range after observing the rally.
Entering a large gap because the signal was valid at a much lower price.
Using the spot stop distance to size an option position.

Check your understanding

A valid setup requires 142 units by risk but only 119 by available capital. Which constraint applies?

Make this chapter useful

Can you defend the reasoning?

Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.

Sources and further reading

Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.

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General financial education. No securities recommendation, assured outcome or personal advice. Read the risk disclosures.