Breakout Strategy Using RSI

Spot breakout stocks using RSI (example included) →

Hey there 👋🏼

You must know that the Relative Strength Index, or RSI, is an oscillator that can be used to identify a stock’s momentum. But did you know that the RSI can tell you about the business performance of a stock as well?

Let’s learn how!

A Unique Way of Using RSI

Looking at the RSI in the weekly timeframe can tell us much about the business performance of a stock, which can be cleverly used for positional trades:

  • When the company is doing well fundamentally, with good financial performance and industry-leading metrics, its RSI is found to be greater than 40.

  • When a company is facing multiple obstacles in its business and is unable to keep up with industry averages, its RSI tends to remain below 60.

Based on this logic, a trading strategy can be built.

How to use RSI for Breakouts

The strategy involves 2 steps - identifying a suitable stock & taking a position in it at an opportune time.

1) First, look for a stock whose RSI has remained >40 in the weekly timeframe for most of its existence. It’s a good idea to start with NIFTY50 stocks.

2) Once that stock becomes a part of your watchlist, wait for one of the following:

  • If the weekly RSI crosses above 60, an entry can be made when a bullish candlestick pattern is formed, signaling a breakout.

  • If the weekly RSI drops below 40, you can enter when a bullish candlestick pattern follows. Since it’s rare for such a stock to trade below an RSI of 40, its price can be considered to be bottoming out and expected to bounce back with the formation of a pullback pattern.

A breakout can be traded from the daily & hourly timeframes as well, after the weekly RSI breaks out above 60, provided a confirmation is obtained, preferably a bullish candlestick pattern

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Example - Breakout Trade in RELIANCE

Reliance Industries Ltd. is a good candidate for this strategy as it is a long-established conglomerate with an RSI consistently greater than 40 in the weekly timeframe.

You can see how a breakout trade (highlighted in green), or a pullback trade (highlighted in blue) could have been taken based on signals from the RSI.

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Happy learning,

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