Renko Charts Explained & How to Use Them for Trading Profits
Renko charts are developed by the Japanese, like candle sticks and other forms of technical analysis.
One major benefit of these charts is that time and volume are eliminated.
Renko charts rely solely on price movement.
We have long embraced non-time based charts for technical analysis. These charts are a good start into the world of range charting.
Let’s take a deep dive into the Renko charts and explain exactly how they work, and how to use them for your trading strategy.
Renko Charts – Explaining How They Work
Renko charts eliminate minor price movements, making it simpler to identify trending markets and key movements only.
One downside is that some price information is completely filtered out and eliminated all together.
When creating a Renko chart you need to start out by selecting a “box size”. This will be the unit of measure for each new renko chart bar that prints.
This means if you have a box size of 10 points on the SP500 index, you will only get a new bar when the stock market moves 10 points.
If it does not, it will stay on the same bar, effectively eliminating the effect of time.
Assuming the SP500 index is at 2,678 at this moment, a move to 2,687 would not print a new bar.
Because the price only moved 9 points. You need a full 10 point move, because we selected a box size of 10.
Below you will find a renko chart and traditional time candlestick comparison:
- Notice that the chart on the left is more trending and clearer to spot the direction
- Chart on the right is a candlestick time chart, 60 minutes per candle
- Both charts cover roughly the same amount of time, approximately 2 trading days
Renko Charts – How to Use Them in Your Trading Strategy
There are many different ways that traders apply these powerful charts.
One of the best ways is to use them for their biggest advantage – identifying the trend direction and smoothing out noise.
Here are a few rules that can be applied as a starting point for every trader:
- Decide what “box size” is best for the asset and time of day you are trading
- If Renko charts are showing an uptrend, only trade in that direction
- Use other technical analysis tools for support and resistance levels
- Avoid trading against the overall trend
These are basic rules to start with when using the Renko charts.
Renko Charts – Fixed Value vs ATR
When choosing your Renko charts parameters you have the option to choose fixed value or ATR.
Fixed value charts mean that you will only form a new bar when you have a fixed number of ticks of price movement.
Meanwhile, the ATR will be based on the popular momentum technical indicator called Average True Range.
The ATR indicator measures the average move that has occurred in the last x days. Assume that the 14 day ATR is reading a value of 15 points on SP500. Renko charts bars will automatically change to 15 points to “snap” to the ATR value.
You should experiment with both and find the setting that works best for you, and for the specific instrument you are trading.
Fixed value is a static number, while the ATR is dynamic and adapts to market volatility and conditions.
The chart below shows the Renko charts based on the ATR value:
Renko Charts – What are the Drawbacks
You have to remember that these charts are just one tool on the belt.
They are not designed to be a stand alone set and forget strategy. Because they filter out a lot of price data and ignore volume and time, they are not precise on smaller timer frames and price moves.
But when you incorporate them into your strategy as a trend following tool they will shine.
You will notice your trading probabilities increase as you trade with the prevailing Renko charts trend and not against it.
It is very important to be using a chart that eliminates time from the equation.
Time is irrelelvant in most trading applications. All that matters is volume and price.
There are some equally powerful chart types that we will cover in our blog in the future.
For now you should start using the Renko charts and experiment with different settings and box sizes.
Once you find the right one for your trading style and every product you trade you will be amazed at how accurately they predict the market trend.
Until next time traders, manage your risk and trade like a TRADEPRO!
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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.