What is the Renko Trading Strategy?
Renko charts are a bit different than your typical candlestick chart that you may be used to. Renko charts focus on price changes that meet a minimum requirement, and completely ignore time. Because of this, they are somewhat similar to point and figure charts, or perhaps tick charts. It doesn’t matter if it takes a week for price to change, there will be no markings on the chart until price changes. Renko looks a bit different than other charts, because they use bricks, which can be thought of as looking like candlesticks with just the body.
You can see that there are a lot of blocks that are relatively straightforward, and you will also notice that they don’t change color as quickly as you may be used to seeing. The chart attached above is a daily time frame, but it will look the same regardless of time.
The idea of Renko charts is that they are based on bricks with the fixed value that filters out smaller price movements. In a typical charting, each bar or candlestick has a uniform date axis with equally spaced days, weeks, and months. There is one candle per hour, day, or whatever timeframe you are trading. However, a Renko chart will completely ignore time and focus only on price changes. So for example, you can set the brick value at 10 points, and therefore the chart won’t draw anything more until a move of 10 points or more happens.
A scenario might go something like this: eur/usd is trading at 1.1750. During the course of the next hour, the EUR/USD goes down to 1.1748, and as high as 1.1757. There has not been a 10 point move in either direction, so nothing is drawn. However, five minutes later the EUR/USD pair rallies to the 1.1761 level. At that point, a bullish brick is drawn. It doesn’t matter that it took 65 minutes, just that we made that move.
How can I use Renko to help me?
Renko can take out a lot of the noise that time can bring into the picture and give you the direct picture of what price is actually doing. It eliminates a lot of the noise from candlestick charts, and get you focusing on what the market is actually doing as opposed to what it is supposed to be whispering to you. It can also help you out if you are looking to trade bigger or smaller price movements. For example, if you use 50 point bricks, it takes a while to form a bullish or bearish brick. That tells you that the market is actually moving, and you may be on to something bigger.
Renko also makes it easier to spot support and resistance because it focuses on what actually happens, not where price fails. Take a look at the chart underneath, it’s the weekly chart of the USD/CAD. Can you see how cleanly support and resistance shows up on the weekly chart? You can see how this truly helps you see where the market is trying to go. This also can help you figure out what parts of the market truly matter.
There are a multitude of ways that Renko can be drawn, because you can simply change the points needed to draw a new brick. Again, going back to the small versus large trend trader, you change the amount of points. If you are looking for small scalps, then you might be looking at a five-point brick. However, if you are looking to follow larger trends, you might need a 50-point brick.
However, you can also change the settings from the closing price to the range. For example, if you choose to pay attention to 50-point ranges, you can then have a new brick drawn every time there is a 50 point move. For example, the currency pair you are trading may drop 20 pips, then rally 30 from the original price. That is a 50 point range, and therefore would draw a bullish brick. (Example: USD/CAD drops from 1.3125 to 1.3105, then turns around to break to the 1.3155 handle. That would result in a bullish brick.)
You can also use Renko to plot other things such as ATR, or Average True Range. This gives you an idea as to whether momentum is starting to pick up or not in a trend and can give you a “heads up” as to when acceleration is working in favor or against a market.
Three brick breaks
Just like candlesticks, you can see that there is such thing as a three brick break available for trading, and a multitude of other strategies. This is the simplest way to trade Renko though, looking for a reversal and a confirmation. What you are looking at just below is a close-up of this and the action. You can see that we had several green bricks form, only to be reversed by the third brick at the high break down and show the beginning of the market rolling over. On a break down below that third brick, it is assumed that the reversal is confirmed. At that point, it shows that momentum is starting to reach to the downside. At this point, you’re not focusing on the shape of a candlestick, you are focusing on the fact that momentum is picking up to the downside. This keeps you with the trend, and that’s the point: Renko is about the trend and potential reversals.
Needless to say, there are thousands of alternatives as far as trading strategies, but this one is by far the main reason why Renko was developed. Most traders I know use Renko for finding trends, support, and resistance, and then will add it candlesticks for fine tuning entries.