Renko Charts - Beyond Candlesticks
The Nuts and Bolts or “Bricks” of Renko Charts
If you are coming from a lengthy background of candlestick trading in the forex market, your first impression with Renko charts should prove that there is just too much market noise with candlesticks. All traders know about noise when it comes to chart analysis in any financial market. We attempt to ignore it mentally during our live analysis. We even apply free or paid filters ad nauseam to eliminate this natural, yet extremely distracting and virtually useless market phenomena.
Renko charts remove the noise that comes with traditional candlestick charts while normalizing price action against time.
So, what are they? The word Renko is derived from the word for brick in Japanese – renga. Unlike candlestick charts, Renko charts only consider price movement and are not concerned with time. In their purest form, the trader selects a brick size, i.e., ten pips and when price moves up ten pips a new up brick is formed. Conversely, when the price drops ten pips, a down brick is built. The change in price need not be continuous; it only needs to be equal to the brick size chosen by the user.
Bricks can be any size and can get more complex by basing moves using OHLC data rather than just the Close price. They can also be compared to the Average True Range and other methods. We have found that using the Close price and keeping it simple stays true to the Renko chart and its accuracy, without noise. However, we encourage experimentation with this great charting tool.
Renko vs. Candlestick – Remove the Noise – Remove the Myths
Compare the two charts below. They both are of the AUDCAD on a 25-minute chart compression and cover the same time frame. Which would you rather trade? The Renko chart is set to 10 pips per brick. Admittedly, most of us could catch a few of these bricks on each reversal, continuation, or break of trend. Look at all of the opportunities, and this is only during a ~ 4 day period. Stay with the topic here and keep an open mind as this may be very controversial to most of you. Ask any candlestick trader with even the minimum experience, and they will most likely be able to spout out well-known candlestick chart patterns such as a hammer, falling star, doji, and more. The reality is that if you were to look within the charts, these patterns exist in some form all of the time, yet we only consider them valid when there is a reversal – after it happens.
So, what’s the point? Do we think that because, for that specific candle, or two or three that the market made them in a way to clue us in on a reversal, on purpose or by any other means? Of course not, looking for candlestick patterns is precisely that and nothing else, looking for something and you know what? They mean nothing because they only mean something after they happened. Still, have an open mind?
Price is King – The True Price Action for Forex Trading
We are concerned with price and whether it moves up or down, at least that is what any trader looking for profits should be worried about. Yes, price movement over time can be helpful, however, you don’t have to give this up with Renko, it’s just much cleaner. Actually, this approach should be relief to many – no more patterns.
What about indicators? Yes, you can use them and most just the same. Some, that require a time reference can still be applied, however, with some tricks – of course, we know them.