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Mastering the Back-Test Short Setup

Futures Networks Live

Introduction: Embracing Simplicity in Trading

For those new to trading, or for traders looking to refine their strategies, mastering straightforward setups can be the key to consistency and confidence in the markets. The back-test short setup is one of the simplest and most effective strategies to understand and implement, especially in bearish markets. The key to success with this setup lies in identifying clear and obvious market movements around areas of support and resistance. This guide will walk you through the detailed steps of identifying and executing a back-test short trade, allowing you to take advantage of potential downward trends with clarity and precision.


Back Test Short
Simple Back-Test Pic - credit @adammancini4

Why Learn the Back-Test Short Setup?

This setup is especially useful in a bearish market. It involves entering a short position when a previous support level, which was broken with high momentum, is retested as resistance. This strategy helps traders manage risks effectively and capitalize on the continuation of downward trends.


Identifying Key Levels on Larger Timeframes

Using larger timeframes, like the 60-minute or 240-minute charts, helps in identifying significant market levels with greater clarity. These charts provide a clearer view of the market, highlighting substantial support and resistance zones without the noise of lower timeframes.  For more info on finding key levels on larger time frames, check out this blog post https://www.futuresnetworks.com/post/using-support-resistance-to-find-key-levels-on-your-charts


Detailed Breakdown of the Back-Test Short Setup

Step 1: Identify a Strong Breakdown of a Support level

To capitalize on a back-test short setup, the first crucial step is identifying a strong, high-momentum breakdown through a key support level. This move should be decisive and noticeable, indicating a significant shift in market sentiment. Traders should look for a substantial increase in trading volume accompanying the breakdown as this confirms the strength and conviction behind the move

- Indicators to Use: Volume Up/Down bars, RSI (Relative Strength Index), Cumulative Delta all can help confirm the strength of the breakdown.  Also just seeing the candle size compared to other candles in the area can be a strong clue.

- Chart Patterns: Patterns such as head and shoulders, bear flags, or expanding triangles can precede strong breakdowns.



Momentum move thru a key support/resistance level
Momentum move thru a key support/resistance level

Step 2: Define the Zone

Once a breakdown has occurred, define the resistance zone that the price has broken through. This zone is typically where the price had previously consolidated and/or shown support and resistance.  Also, keep an eye on any bull flags or ascending triangles that have broken down and did not continue in the direction of the uptrend.  For more info on Bull Flags check out this blog post https://www.futuresnetworks.com/post/bull-flag-1-bullish-formation-setup

- Historical Relevance: The zone should have historical importance where the price has shown significant reactions in the past.

- Tools for Identification: Use horizontal lines or price channels in your trading software to mark and monitor these levels.

Resistance zone that will look to back-test
Resistance zone that will look to back-test

Step 3: The Retest/Back-Test

After breaking down, the price will often retrace back to the defined zone, now expected to act as resistance. This retest is crucial as it provides the entry point for the short position.  You may get a 2nd shot at it if you miss it the first time. 

- What to Watch For: Key areas that were support and resistance, or a bull flag, ascending triangle, or other bullish chart pattern that broke down. This area will be retested.

Back-test setup for short entry.
Back-test setup for short entry.


As you can see from this trade in late December, this was the key area that started our Bearish environment.  Bulls need to reclaim this back-test to get back full control. 

 

Step 4: Execute the Trade

Entering the trade involves precise timing and risk management. The first retest of the resistance level offers the highest probability of success. Subsequent retests may also provide entry opportunities, but the probability of success diminishes on each test.

- Entry Point: Enter a short position during or just after the rejection confirmation. This timing minimizes risk as it allows for a tighter stop-loss just above the resistance zone.

- Risk Management: Set stop-loss orders just above the resistance zone to limit potential losses. Determine the size of the position based on the distance to your stop-loss to manage the risk effectively.

- Profit Targets: Set profit targets based on key support levels below the entry point. When trading multiple contracts, consider using a trailing stop-loss once your first target has been hit to maximize gains if the price continues to move favorably.


As with any setup, there is no substitute for screen time and seeing the setup hundreds if not thousands of times.  Playbacks/Back-testing the setup is a great way to get practice. 


Trade Well at FNL!

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Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. Futures Networks Live is 0% incentivized by any exchange, broker, charting service, coin, token, cryptocurrency, developer, or any other industry affiliate. TESTIMONIALS APPEARING ON FuturesNetworks.com MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS OR CUSTOMERS AND IS NOT A GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. 

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