Renko chart strategy
Also, as there is no candlestick pattern in Renko, it saves a lot of learning time, and prevents the traders confusion, because learning the candlestick patterns needs time and energy to learn everything and get more experienced otherwise the weak and false candlestick patterns can easily deceive you. Be sure to check current market price before placing an order. Click here for a live example. Traders who use Renko charts typically do so because they are easy to use and interpret.
Construction and Characteristics
They have no upper or lower shadows. We can change the box size in the Renko charts. A new box will appear on the chart only when a special level of price change occurs.
When the box size is set to a smaller settings, then new boxes come faster, but when the size is set to a higher settings, then a larger price change needed, in order to appear a new box on the chart.
The smaller the size, the higher number of boxes, and so more details of the price changes. The larger the size, the lower number of boxes and less details from the small price changes and noises. Therefore, the first and most important feature of the Renko charts is eliminating the markets noise. The other important feature is filtering out the thin or non-liquid markets that have no proper and enough liquidity, and so, are not suitable for trading.
The reason of having these features is that a new Renko block appears on the chart only when there is a certain amount of the price movement. Whereas in the candlestick and bar charts, one new candlestick or bar has to form within a special time frame, even if there is no reasonable price changes.
Please note that there is no time frame in Renko because time is not considered in Renko charts algorithm at all. Therefore, unlike the candlestick line and bar charts, the horizontal axis of the chart although it still shows the time , has nothing to do with any time frame and it merely shows the time that each block has appeared on the chart.
As you can see on the below chart, the distance of different years is different from each other. For example, the distance of and is longer than and This is exactly the same chart while the box size is set to 0. The smaller the settings, the more blocks on the chart and visa versa, because smaller settings means one block based on a smaller price change:. The above chart covers about 2 years from Sep to Sep The technical analysis rules are the same in the Renko charts and you can enter a trade after a support, resistance or consolidation breakout.
Renko charts are great tools for entering the volatile markets and staying away from the shallow, choppy and noisy markets, because for example a support or resistance breakout forms on the chart only when there is a reasonable price movement that has formed a support or resistance, and then a breakout forms only when the price moves strongly to break a line.
Therefore, there is less change of a false breakout:. The box size in the below Renko chart is set to 0. As you see, your can easily find good trading opportunities using the technical analysis rules when you use a smaller settings of the Renko chart, because it shows more price movement details:.
The below chart is the candlestick chart that covers the same time span as the above chart. As you see, the short trade could be easily distinguishable in the candlestick chart, but it was a little hard to decide for a long position after that. It is possible to have more trade setups with Renko chart, but the problem is that in many cases we get in the market when it is too late and the price has already moved a lot.
This is the main reason of the Renko chart invention. It was invented to eliminate the noise through ignoring the time and recording the price changes only. This is a really good feature for the traders who are not patient enough, and so they over trade.
Ranko pushes them to wait for the real trade setups and breakouts. Also, as there is no candlestick pattern in Renko, it saves a lot of learning time, and prevents the traders confusion, because learning the candlestick patterns needs time and energy to learn everything and get more experienced otherwise the weak and false candlestick patterns can easily deceive you. If you set the Renko to the smaller settings, like what I have done on some of the charts here, then you will have one Renko box for each of the price changes, and it helps you catch all of the movements, patterns, and probably trade setups.
But this is not recommended because to creates a lot of noise on the chart. Therefore, it depends on the way you use Renko. If you set it to 1, then you will eliminate a lot of price ups and downs and noise, and you will only have the strong movements. And if you set it to 0. I cannot see any clear inverted head and shoulders on the above candlestick chart whereas it could be seen sharply on the below Renko chart. It seems it is a big help to confirm your technical analysis results.
However, you can have it on MT4 as well through installation of a custom indicator. Open a price chart, and then open the Navigator. Drag and drop it to the price chart. You can have the Renko chart on your platform and try it for a while. Compare the trade setups you locate using your own trading system with something that Renko shows. You can use Renko to confirm your trade setups.
After a while, if Renko helped you take stronger positions, and make less mistakes, then it means it is a proper tool for you. This is what I recommend, specially to novice traders. Another brick would only be added if you were to have a new close another two dollars higher. For there to be a brick created in the opposite direction, you would need prices to reverse and close at least two times the size of the brick.
If price does not do this, then any correction will be ignored by the chart. The advantages of the Renko chart can outweigh the disadvantages. However you should be aware of what those disadvantages are. First, these charts are price based and time is ignored. There could be a long period before a new brick is created. Using a daily close for these charts could mean there may be several days or even weeks before price moves significantly enough to create a new brick.
With intraday Renko, there may be hours between brick creation. A trader must be very patient in this case as the trend has paused and become choppy. Since there is no reversal shown until a new brick could be drawn in the opposite direction, the stops could be quite large. Of course making the brick size smaller can tighten the stops but as I mentioned, this comes at the expense of price sensitivity. Trends can be seen much easier when using these types of charts.
Supply and demand zones also seem to be more visible. When trading, always trade in the direction of the dominant trend. You can stay in the trade until your next target is reached or when you have a sign of reversal which would be a brick in the opposite direction.
Next week I will discuss more advanced methods of Renko charting and how to incorporate technical indicators with them. Which Time Frame is Better? Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.