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Introduction
In this section, I would be explaining the RSI and Ichimoku Indicators separately and as well as when used together. Generally, there is no indicator that can work 100% in producing accurate and perfect signals but when two indicators are used together, they can produce more than 90% perfect and accurate signals in the market. When two indicators are used together they help in filtering out false signals in the price movement of the asset.
First of all, let's look at the RSI indicator and its function. The RSI indicator as we know is a momentum indicator that is used in measuring the price momentum of crypto assets to indicate if the price of the asset is in the overbought or oversold condition in the market. The RSI indicator has two levels that are, the RSI 30 mark and the RSI 70 mark. When the price of the asset cross below the RSI 30 mark then it's an indication of oversold condition in the market and a possible trend reversal from bearish to bullish. Similarly, when the price of an asset crosses above the RSI 70 mark then it is an indication of overbought condition in the market and a possible trend reversal from bullish to bearish.
The RSI indicator is a good indicator in filtering out false signals when the price of an asset is in the trending market. The RSI indicator also has flaws in filtering out signals especially when the price of the asset is not in the trending market. Now let's look at the Ichimoku indicator on the other hand.
The Ichimoku indicator is a trend-based indicator that is used in identifying the price direction of an asset and also for identifying dynamic supports and resistance levels on crypto charts. One flaw of the Ichimoku indicator is that it lags behind the price movement of the asset in the market as such can produce false signals. Let's now look at using these two indicators together.
When the RSI indicator is combined in use with that of the Ichimoku indicator, it helps traders to filter out false signals in the price movement of an asset. Combining the two indicators also helps traders to identify trend signals before their formation on crypto charts. It also helps traders to identify good entry and exit points in trading.
In this section, I would be explaining some of the flaws of these two indicators when used individually. first of all, we will look at the flaws of the RSI indicator.
Flaws of the RSI Indicator
The RSI indicator is momentum-based and as such does not help in identifying trends of assets for a long period of time.
The RSI indicator can't be used in measuring the buying pressure of an asset in the market and how long it will take an asset's trend to move.
Due to the momentum-based of RSI indicator, it doesn't perform or function properly during trending markets and such producing false signals in the market.
The RSI indicator sometimes stays at the overbought and oversold region for a longer period of time which produces false signals because the price of the asset can still be at those regions whilst trend reversals have already occurred.
The RSI indicator doesn't provide the necessary information for trade entry and exit positions.
The RSI indicator doesn't provide a specific market volume of an asset to help in detecting entry and exit points.
The following chart below is an indication of how the RSI indicator signals a false indication in the price movement of an asset.
From the chart shown above, we can clearly see that the RSI indicated an overbought in the price of the asset above the 70 mark indicating a possible trend reversal in the price movement of the asset. However, we saw the price of the asset continue in the uptrend direction although the RSI indicator signals a trend reversal in the price movement of the asset. This indicates that the RSI indicator failed in identifying the strength of the trend thereby making the overbought signal a false signal.
Flaws of the Ichimoku Cloud Indicator
The following includes some of the flaws of the Ichimoku cloud indicator when used individually.
The Ichimoku Indicator produces late signals for the price of an asset and as a result, leads to the late entry position of traders.
The Ichimoku Cloud indicator has failed to depict the movement of buyers and sellers in the market.
The Ichimoku Cloud indicator depends on the use of historical price data to identify trends and as such can produce false signals because the historical price data of assets can differ.
The Ichimoku Cloud indicator may produce false signals when wrong timeframes are used on crypto charts.
The Ichimoku Cloud indicator produces lags that tend to deceive traders to enter into trades when not necessary.
The following chart below is an indication of how the Ichimoku Cloud indicator signals a false indication in the price movement of an asset.
From the chart shown above, we can see that the price of the asset broke the Ichimoku cloud which indicates a price reversal signal. But unfortunately, the Ichimoku cloud failed to register the bullish trend as early as possible, and as such traders may not earn more profit from the future movement in the price of the asset. The Ichimoku can sometimes break above and below the cloud without indicating any trend after the breakout.
In this section, we would be using the RSI indicator with the Ichimoku Cloud indicator to identify possible trends of crypto assets on charts. As stated earlier, when the RSI line is seen to be above the 70 mark, then it is an indication of an overbought condition in the price of the asset. When there is a continuation in the formation of higher highs at the time of formation of overbought then we can confirm the buying pressure of the asset in the market.
After the confirmation of the buying pressure using the RSI indicator, the Ichimoku Cloud indicator then comes in here to help identify the volume of buyers in the market that is aiding in the rise of the asset's price. In using the Ichimoku, when the price of the asset is seen above the Ichimoku Cloud then it is an indication of an uptrend in the market. Similarly, how the Ichimoku cloud expands also helps to indicate the momentum of the uptrend formed. A good illustration is shown in the chart below.
Similarly, when the RSI line is seen to be below the 30 mark, then it is an indication of an oversold condition in the price of the asset. When there is a continuation in the formation of higher lows at the time of the formation of oversold then we can confirm the selling pressure of the asset in the market.
After the confirmation of the selling pressure using the RSI indicator, the Ichimoku Cloud indicator then comes in here to help identify the volume of sellers in the market that is aiding in the fall of the asset's price. In using the Ichimoku, when the price of the asset is seen below the Ichimoku Cloud then it is an indication of a downtrend in the market. Similarly, how the Ichimoku cloud expands also helps to indicate the momentum of the downtrend formed. A good illustration is shown in the chart below.
In this section, I would be discussing how to use Moving Averages with the RSI+Ichimoku trading strategy. It should be noted that moving averages are trend-based indicators and they help traders in identifying possible trend reversals and also in filtering out false signals in the market.
Moving Average periods mostly depend on the type of trader going to use it, but for the purpose of this lesson, I would say that MA with period 100 would be suitable for this strategy. This is because the Ichimoku indicator already has a small period and as such using a higher period of MA can help in filtering out false signals as well as detecting trend reversals.
From the GALAUSDT Chart shown above, we can see that the 100 periods MA was successfully added. We can obviously see that the price of GALA is trading above 100 MA indicating that the price of GALA is in an uptrend as shown above. Moving averages help traders to confirm false signals as well as confirm the current trend of an asset in the market.
In this section, we would be looking at how to identify support and resistance levels using this strategy of combining RSI and Ichimoku indicators. As we know the importance of support and resistance levels in an asset's price on a chart, it is very necessary for us to learn how to indicate them. It should be noted that during the trending market period of an asset, the Ichimoku indicator is used in identifying the support and resistance levels. Conversely, the RSI indicator is used in identifying support and resistance levels during a sideways market. Now, let's look at each separately with a real example on a crypto chart.
During a Trending Market
It should be noted that during a trending market, the Ichimoku cloud functions as support and resistance levels of the price of the asset. In an uptrend, the price of the asset finds support on the Ichimoku cloud and it serves as support the cloud is green as shown below. Similarly, in a downtrend, the price of the asset finds resistance on the Ichimoku cloud and it serves as resistance when the cloud is red. We should also note that when the price of the asset is seen far away from the cloud, then it is an indication of a strong trend in the market. Likewise, when the price of the asset gets closer to the cloud, then it is an indication of trend exhaustion which tends to weaken the trend. A good illustration is shown in the chart below.
During a Sideways Market
During a sideways market, the RSI indicator is a suitable indicator to be used in identifying the support and resistance levels of an asset on a crypto chart. When using the RSI indicator, the overbought and oversold regions serve as resistance and support levels respectively. A good illustration is indicated from the chart below.
In this section, I would give my opinions on why I think this strategy is a good one for intraday traders for trading crypto assets.
Intraday traders can utilize this trading strategy to identify trends in both trending market and sideways markets. With the aid of the RSI, intraday traders can identify the overbought and oversold conditions in the price of an asset whilst the Ichimoku cloud is used to confirm the condition identified by the RSI.
This strategy is a good one for intraday traders because it will them in identifying support and resistance levels in both trending and sideways markets.
Intraday traders can utilize this strategy to identify good entry and exit points so as to earn profit and avoid loss at the end of the trade.
Intraday traders can use this strategy in identifying and filtering out false signals in the market. In general, this strategy is a good one for Intraday traders when configured correctly.
In this section, I would be executing two demo trades one for buy order and the other for sell order trade using this strategy. Let's first look at the buy order trade.
Buy Order Trade for SHIBUSDT using RSI+Ichimoku Trading Strategy
From the chart shown above, we can clearly see that the price of SHIB started to trade above the Ichimoku line. We can equally see that the RSI line crossed above the 50 mark indicating a bullish pressure in the price of the asset in the market. After observing all these, I then executed a buy order trade with take-profit above the Ichimoku and stop-loss below the Ichimoku line. The reward to risk ratio is set at 2:1
Sell Order Trade for ADAUSDT using RSI+Ichimoku Trading Strategy
From the chart shown above, we can clearly see that the price of ADA started to trade below the Ichimoku line. We can equally see that the RSI line crossed below the 50 mark indicating a bearish pressure in the price of the asset in the market. After observing all these, I then executed a sell order trade with take-profit below the Ichimoku and stop-loss above the Ichimoku line. The reward to risk ratio was 1.6.
From the screenshot shown above which was taken after a few minutes of executing the sell order trade, we can see that my exit position was correctly done as the price of the asset is now trading towards the target of the trade. We can also see that I already made a profit of $1.10 USD on the trade.
Conclusion
To conclude, I would like to briefly summarize what has been done so far in this article. First of all, we discussed the understanding of the RSI+Ichimoku trading strategy including their benefits to traders. Again, we looked at some of the flaws of the RSI and Ichimoku indicators when being used individually. We also demonstrated a typical example using crypto charts.
Furthermore, we explained how this trading strategy can be used in identifying trends in the market. Moreover, we looked at some of the uses of this strategy and also indicated suitable lengths for traders to be used.
In addition, we also discussed the concept of using this strategy in finding support and resistance levels on crypto charts. We again discussed how this strategy can be used for intraday traders to earn profits and avoid losses. Lastly, we performed two demo trades on crypto charts with one as a buy trade and the other as a sell order trade.
I would like to say a very big thank you to professor @abdu.navi03 for this wonderful lecture. I have really understood the concept of "Trading strategy with RSI and ICHIMOKU".
Thank You.