GBP/JPY’s Break & Retest Pattern

By Capital.com Research Team09:18 (UTC), 20 February 2024

GBP/JPY’s recent price action has formed a bullish Break & Retest pattern – an underrated pattern which represents a structured way to navigate breakouts.

Here’s the three key components of GBP/JPY’s Break & Retest pattern:

1. The Breakout: On Tuesday, GBP/JPY made a decisive move higher, breaking above a significant resistance level.

2. The Retest: Following the breakout, prices retraced back to the level of the previously breached resistance. This pullback is a crucial component of the Break & Retest pattern, providing traders with a chance to confirm the legitimacy of the breakout.

3. The Reversal: The confirmation of the Break & Retest pattern came on Thursday when a bullish hammer candle formed. This reversal candle is indicative of the broken resistance now acting as support, aligning perfectly with the principles of the Break & Retest pattern. The market then pushed higher on Friday.

GBP/JPY daily candle chart

(Past performance is not a reliable indicator of future results)

Trading the GBP/JPY break & retest

Identifying and Anticipating: Traders who had identified the key resistance level in GBP/JPY prior to the breakout were well-positioned to anticipate the development of the Break & Retest pattern. Utilising price alerts would have been particularly beneficial to notify traders of both the breakout and the subsequent retest.

Entry Points: The entry point for a bullish scenario involves strategically placing an entry order just above the high of the reversal candle. This ensures that traders enter the market with confirmation of the newfound support.

Stop-loss Placement: Proper risk management is crucial. In a bullish scenario like this, a stop loss could be positioned below both the low of the reversal pattern and the broken resistance level, protecting against unexpected downturns.

Price Targets: Traders have the flexibility to set a price target based on market structure or risk. With the GBP/JPY Break & Retest, targeting the next key level or support based on market structure, or opting for a price target twice the size of the risk, could be considered.

Risk Management: As with any trading strategy, risk management is paramount. Traders engaging with the GBP/JPY Break & Retest pattern should implement proper risk management techniques, including position sizing, staying informed with the economic calendar, and diversifying their trading portfolio.