RSI Confirmation For Breakouts
- Technical indicators help decipher price action
- RSI uses overbought and oversold values
- Breakouts should match RSI extremes
Traders have options when it comes to trading. Normally some of the most important decisions made revolve around whether to enter into a trade or not. While some traders will aggressively jump into the market with entry or market orders, others may choose to trade more conservatively and wait for a confirmed trading signal. Today we will review the later, by learning how to use the RSI indicator to confirm market breakouts. Let’s get started!
What is RSI?
Before you place your first trade using RSI,it is important to become acquainted with what the indicator is telling us and why. RSI is a classic oscillator which means the indicator tracks price by moving or oscillating above or below a center line. As seen below, RSI oscillates higher and lower by tracking average gains versus average losses, ultimately causing it to move between the values of 0-100. When RSI reaches a value over 70, traders consider the indicator overbought. Conversely, a reading under 30 is considered oversold. Keep these values in mind as they will become important when it comes time to confirm breakouts.
If you are learning about RSI for the first time, or simply want more information to review the indicator, sign up for our FREE RSI training course using the link below. After registering through the guest book, you can continue to learn the basics of RSI using a series of videos. Then when you have completed the course, feel free to test your knowledge with the attached check point question.
(Valid name, email, phone number, and country are needed)
Confirming a Breakout with RSI
Once you are comfortable reading RSI, you can begin using the indicator to confirm breakouts. While traders normally look for RSI crossovers for trading signals, the exact opposite technique will be used in this example. If price is seen breaking through a key line of resistance, confirmation will occur when RSI moves into overbought territory at a value of 70. The idea is that if market momentum is up, RSI should be up too! The same is true if price is headed down, and breaking through a value of support. Traders can wait and confirm the move using RSI as it pushes below 30. Let’s look at an example.
Below we can see an example of a breakout that occurred last month on the GBPJPY. At that time current resistance was found at 180.00 for the pair. Price vigorously broke through this value on November 3rd. RSI at the same point can be seen becoming overbought. Breakout traders could take that as a sign of increasing bullish momentum confirming any new buy based breakout positions.
Practice your Trading
Using RSI to confirm trading signals, is like any other trading skill and will take time and practice. To help you analyze the market using live charts, register for a FREE Demo account with FXCM. This way you can practice trading with RSI and other indicators while following the market in real time!
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.