Breakout trading is one of the oldest trading styles in the book.

You watch the price consolidate within a range… then, when the price breaks out of that range you pounce, and enjoy all the benefits of that move.

And, often when the price has been stuck, it’ll move out of that consolidation range with some momentum, giving traders a good profit surge.

It’s exactly this kind of set-up that thousands of traders around the planet are scouring charts for. It’s a real bread-and-butter trade.

But… and it’s a big but…

The breakout pattern has an evil twin – the scourge of all breakout traders: the fakeout.

This is what it looks like…

If you’ve ever traded breakouts – you’ll recognize this situation.

Just when you think you’ve caught the big move, the market turns tail, and shakes you out of your trade.

So, how can we tell the difference between a breakout and a fakeout?

There are a number of tools that traders use.

First, I’ll look at three price action tricks that you can easily apply. However, the problem with each is that you’re left waiting for the candles to form their patterns.

Then, I’ll show you an indicator that can give you an immediate breakout/fakeout reading.

Three price-action tricks…

There are clues in the candlesticks that give information about whether it’s a genuine breakout. These are all worth considering, and can be used in conjunction with other tools.

Traders can:

1 – Wait to see if the candlestick closes through the line of support or resistance. (Just a wick poking through isn’t enough to confirm a breakout). It’s a good rule to follow, but on its own, not particularly reliable.

2 – Wait for a close beyond the support/resistance level… and then a retracement back to the line… and then a close beyond the first close. This ‘resistance-turns-support’ technique is a really reliable way to trade breakouts, but it does involve a lot more waiting around, watching charts, so it’s just not practical for all traders.

3 – Look for big candlesticks, which indicate that there’s momentum behind the breakout. Again, this is a good test, but a large candle means that you’ve potentially missed a hefty part of the move, so it’s far from perfect.

Now, I’ll show you a faster way to get confirmation…

Immediate yes/no confirmation

That’s what we’re after – a quick yes-no answer to whether we can rely on this breakout, or not.

Well, here it is…

Add an RSI indicator.

So, if we’re looking for a breakout, we’ll expect that breakout to come with a degree of momentum. And I’ll use the RSI indicator to find that momentum – RSI measures speed of a move… so if that speed is increasing… momentum will be building…

I’m talking about RSI convergences.

So, if the price is moving up through our trend line, I’ll want the RSI indicator to be showing higher highs, signaling building momentum.

Here’s an example, where the USDCAD has breaks out of its trading channel to the downside. The RSI clearly shows significant downward momentum on this breakout…

This kind of RSI reading suggests that traders have their foot on the pedal, and can drive this price lower… which is exactly what they do.

And right now, as you can see on the chart, there’s another nice consolidation pattern forming, which you can be sure that breakout traders are watching closely.

Here’s another example, this time from the Nasdaq, showing how the RSI can keep us out of trouble…

Of course, no indicator is infallible, but using RSI to confirm breakouts will give you a significant edge. I recommend that you add it to your charts, and see what it can do for you.