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PTMC team 08.07 2014

Renko charts – trading based on volatility

In this article I would like to present Renko charts, which are quite different from what almost every beginner learns. Most common chart types are candlestick and bar charts. Also line and solid charts are quite easy to find in various platforms and data sources. But when it comes to other types of charts, many traders have no idea what else is there. Most beginners, if not all of them, learn candlestick charts and very often basics of Price Action and Technical Analysis. They are getting used to wicks, bodies, different ranges, positions and meaning of traditional candles invented in Japan. Actually, Renko charts have been introduced first in Japan too, but never became so popular.

First very important fact which may confuse you is that Renko chart basically does not use time as a factor. Each box is equal in terms of height and width, and the most important thing is fixed pips range from Open. There is also possibility to display boxes in terms of High/Low range, depending on settings. So, one box opens immediately after previous is closed, and closes after certain number of pips is passed. Therefore, depending on current volatility, one box may be formed in couple minutes, couple hours or just in a blink of an eye when important data is released.

Renko charts

If you set box value to 5 pips, then each box will be exactly 5 pips high and it doesn't matter if it’s during night hours or in the middle of the 'overlap'. Therefore two different days or sessions may have different number of bricks because of differences in volatility. Calm day, like holiday Monday on Forex, may have only couple boxes, while first Friday when Non-Farm Payrolls is released, may have dozen or more.

each week has different numver of bricks

Identifying technical patterns never been easier

Renko chart is different from candle/bar chart mainly because of no time but also no wicks. This type of chart has no wicks at all (in standard version) and shows price movement only if it exceeds certain range, however there is a good reason for that. Displaying only meaningful movements allows you to filter all the noise out, therefore you are able to react only when market shows signs of picking specific direction. Wiping most of the noise out makes it easier to tell what trend is prevailing and where key technical levels are placed.

Identifying technical patterns never been easier

Many sources state that Technical Analysis and swing patterns apply to Renko charts as well as to common chart.

Many sources state that Technical Analysis and swing patterns apply to Renko charts as well as to common chart.

Some traders use technical indicators like Moving Average with Renko to confirm trend or reversal.

Moving Average with Renko

Advantage

Trading with Renko chart has some specific advantage comparing to traditional OHLC charts, and that is predictability. It doesn’t mean that it is easier to tell whether price go up or down, but you will be able to tell when and what signal may occur. In case of candlesticks or bars you cannot be sure whether candle/bar will be bullish or bearish until it’s closed. In case of Renko you have strict conditions that have to be met to induce certain change. On the screenshot below you can see position placed 31 pips above last brick's closing point - to trigger the trade price would need to add 2 upward boxes to our chart creating pretty common reversal pattern. Our Stop Loss is 21 pips lower because two red bricks, if they came next, would scratch our plan.

Advantage

Disadvantage

Certain con of such chart style is that you cannot see price movement. You do not see dynamics and counter-movments smaller than predefined value.

Disadvantage

How to set Renko value?

Some traders recommend to use Average True Range indicator to determine what Renko value is valid at certain point in time. It sounds like good idea, but remains unclear how often should we update bricks' values and how would it affect our system's performance. Also it would decrease meaning of volatility factor on which Renko chart us based.

Of course you have to base somehow on instrument's volatility whether it's stock index, FX pair or commodity futures. But then it seems not good to change brick value too often, but it would be better to fit it to trading system and time horizon. Obviously, Renko chart does not contain time factor, but still price movement needs time. So if you like to trade fast, you could consider 3 pips/points Renko, for intraday 5 pips also seem legit. For swing traders 5 or even 10 would be good. Looking for good box value, you need to consider the fact, that too low value will show minor swings (too much noise), but when you set value too high, then some major swings may look as a minor ones. Therefore, finding 'golden mean' looks like good idea.

How to set Renko value

Nonetheless, Renko chart type seems fascinating and require lot of research before trader might use it properly. If you believe that volatility is the key part of trading, then you will find this tool interesting for sure.


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