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RSI Support and Resistance Breakout

I have already talked about the most important and useful indicators that we can trust and use: What Indicators Can We Trust and Do We Need the Most?

Also, two weeks ago, I published another article focused on MACD and the way I use it: How to Use MACD Indicator?

I recommend you to read those articles carefully. They are very useful to help you confirm the trade setups you locate.

After candlesticks, Bollinger Bands and MACD, RSI indicator is the last useful indicator that I can recommend. In spite of this, still I do not have RSI and MACD on my charts. Candlesticks and Bollinger Bands are the only indicators I use, because my experiences have proven that the strong setups that I trade, don’t have to be confirmed by any other indicator, and candlesticks and Bollinger Bands are enough. And when the setup is not strong, even the MACD and RSI confirmation doesn’t help, and in most cases the positions that are taken based on the weak setups will end to loss. So, for me there is no point to have the MACD and RSI on my charts.

However, as RSI is the last useful indicator that I know, I like to have a few articles about it and tell you about the exceptional features that it has. At the end, it is “you” who has to think and decide about the indicators you like to have on your charts. If you ask me, I say although MACD and RSI are good indicators, candlestick and Bollinger Bands are enough to keep our trading as simple as possible and make money without any problems. We should keep our trading system as simple and possible.

Before talking about RSI support and resistance breakout, I recommend you to read this article one more time to know why candlesticks and Bollinger Bands are enough for me: What Indicators Can We Trust and Do We Need the Most?

RSI or Relative Strength Index:

RSI stands for Relative Strength Index. I don’t want to bring its formula here, not to make the life too complicated. Its formula has no importance. The only important thing is that we know how to use the indicator to pick the setups. It is the same with the other indicators too. I have been using the Bollinger Bands for over 20 years. It has helped me to pick too many strong setups and make a lot of money, but still I don’t know what its formula is exactly. The formula doesn’t work for me. I should only know how to use the indicator.

RSI default setting is 14. However, I prefer to use 9, because it makes the RSI highs and lows more visible. So here we are  using RSI(9).

RSI looks like a very simple indicator on the charts, but indeed it has some unique features that can not be found with the other indicators. Like the price graph, RSI also forms highs and lows that can be connected to each other and create some support and resistance lines. Like the support and resistance lines that we plot on the price graph, the RSI support and resistance lines can also be tested, broken and retested. This RSI great feature becomes even more interesting when you know that sometimes RSI support/resistance breakout occurs one or two candlesticks before the price support/resistance breakout. And this feature can be used as the leading signal indicating that the price support or resistance will be broken very soon too. It helps us get ready to take a position before the price support/resistance breakout.

Here, I am going to show you the famous example I have usually had on my articles in the past few weeks. It is the short trade setup that formed on EUR/USD daily chart. The 2014.05.08 candlestick formed a very strong bearish engulfing pattern on EUR/USD daily chart. In addition to strong bearish engulfing that this candlestick formed, its upper shadow also broke out of the Bollinger upper Band very strongly.

I went short after the 2014.05.08 candlestick close and while the next candlestick was forming. I did this just based on the bearish engulfing pattern that the 2014.05.08 candlestick formed, not based on anything else. However, those traders that such a candlestick pattern is not enough for them to go short, were waiting for another trade setup which was the breakout of the the support line that was already formed on the EUR/USD daily chart.

As you see on the below screenshot, there is a support line on the price graph (from the 2014.04.04 to 2014.04.30 candlestick). This support line was finally broken by the 2014.05.09 candlestick. At the same time, a similar support line formed on RSI, but with this difference that the RSI support line broke when the 2014.05.08 candlestick closed (which is exactly the time I went short based on the bearish engulfing formed by the 2014.05.08 candlestick).

The traders who were waiting for the price chart support line breakout, could go short only after the 2014.05.09 candlestick close, which is one day later than me and 80 pips below my sell price. This is not that good. However, if they had the RSI on their charts, it could help them trust the 2014.05.08 candlestick sell signal, and go short one day earlier and with an 80 pips higher price. Please look at the below screenshot and see how the RSI support was broken one day earlier than the price support line breakout:

Here is another example:

The below screenshot shows that the price resistance broke when the candlestick #2 closed, but the RSI resistance broke by the candlestick #1. I mean the RSI resistance was broken one candlestick sooner than the price resistance.

Conclusion:

Those who like to trade based on the technical analysis and support and resistance breakout, can have the RSI(9) on their charts and take the advantage of the early and leading breakouts that RSI forms. Even if they don’t enter after the RSI support/resistance breakout, at least they will be informed that the price support/resistance will be broken by the next candlestick. This helps them not to miss the trade setups.

RSI has some other good and useful features that I will describe in other articles.

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29 thoughts on “RSI Support and Resistance Breakout
  1. PRESHH says:

    I found your article useful please me details on how to use Bollinger band and candlesticks to trade thank you.

  2. Thys Uys says:

    Dear people of LuckScout, you are phenomenal. I am trading on your recommendations. On Monday morning I scrutinised the weekly charts to determine the general direction of the currencies. only candles and BBands.
    Then I search for trade setups on the daily chart with BBands and MACD open with the larger settings which you recommended.
    So far this week I had 7/8 winning trades, 4 are still open and 400 pips gain!!
    I was taught that it is dangerous to keep trades open over a weekend because of so called “Black Swan events”
    What is your view?

    Regards.

    • Chris says:

      You are doing great. Congratulations!

      When you trade based on the weekly and daily charts, sometimes you have to hold the positions during the weekends. That is not a problem at all.

    • Tom says:

      Hi Thys Uys, first congratulations, please can you write on which currencies you see 8 trade setups on daily charts? I dont see them, maybe you can help other Chris students too.
      Thank you
      Regards

  3. okeke says:

    I’ll add this indicator to my chart and see how it works out for me.

  4. Joshua Keftin Amuga says:

    Thank you so much Dr Chris for the knowledge. While learning i came across certain facts about the probability of a realistic trade setup. I found out that no matter how genue your stop loss is on intraday trading with smaller time frames they are always hit. I concure to you about using bigger time frame. Secondly this time it is a question. Is it possible not to see a strong setup for a week of searching for a good trade setup.

    • Chris says:

      Yes, it is possible that we don’t see any strong setup for a week. However, this is not a problem at all, because in some weeks we will have several strong setups. It is not a problem not to trade for a week because there is no good trade setup. Taking too many bad positions and losing money is a problem.

  5. Vladimir says:

    On the second screenshot – Where is the trade setup on base Candelstick?

  6. Joshua Keftin Amuga says:

    In the EURUSD daily chart, we had an uptrend, then a dark cloud cover appearing outside the upper BB. Ok my question is this, if one would have gone short the next candle would have triggered the stop lost because the bullish candle stick had long shadows. So if then we are trading based on trend change we will consider the breaking of the resistance to follow a trend. How does One co-relate all this techniques?

  7. Djalil says:

    Hi,
    i have a generic question what is the name of the charting software you are using ? in mian i cant draw RSI support lines
    thank you

  8. Düajé says:

    i want to say thank you to Chris for his great and insightful articles. they have shed light to so many aspiring traders like me learning to fine tune their analytical skills to become a pro. thank you once again.

  9. jason says:

    Is price resistance and trend line the same thing?

    I’m beginning to see and believe that you really don’t need anything but the bbs and candlesticks.

  10. Pritam says:

    Dear How To Decided SL in Rsi Brakeouts trade?

  11. TJ says:

    This something totaly new for me so, I don’t have to rewind my brain 🙂

    Chris,
    Would you please take a look at the attached chart and tell me if my slope is too steep for the support line?

    https://charts.mql5.com/7/586/cadchf-d1- -capital-markets-2.png

    Again many thanks sir.

  12. Charles Booth says:

    Great article , I find myself torn between using just bollinger bands or adding macd,rsi,stoch…but either way its good to know how to use them properly in case i do keep them or can answer question to someone who ask. Thanks

  13. muhammad ashraf says:

    you are a great teacher in the world GOD bless you

  14. Ivan Todorov says:

    Hello Chris, correct me if i`m wrong but am i the only one who noticed that on the first chart the price support broke before RSI support? I couldnt plot the vetical line that clearly, but it is noticable that the candle is first

    http://prikachi.com/images.php?images/296/8814296C.png

    • Traders can enter when all the trading system requirements are met. In this system, traders need a support/resistance breakout on the price and RSI. They should wait for them to occur. It doesn’t natter which one occurs first.

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