Renko Charts: Eliminate whipsaws with This Powerful Charting Methodology
Renko is a powerful charting methodology that has been in use for at least 100 years, if not longer. As we will see, it takes a different approach to charting than the more traditional time-based charts do. The end result is a smooth chart from which you can take trade signals with high confidence. Naturally, no charting system is perfect. In this post, we’ll explore both the advantages and the disadvantages of these charts.
What’s more, this trading methodology can be quite powerful when paired with MetaTrader. Renko MT4 programming can provide you with a clear advantage.
Let’s get started.
Renko Charts: Usage
The origin of the renko forex chart is unclear. However, this particular charting methodology is thought to have originated in Japan, having been created by Japanese commodity traders. The Japanese word for bricks, when written in English, is ‘renga,’ which is quite similar to ‘renko.’ Additionally, some have pointed out that the chart’s plot points resemble bricks.
Renko forex charts do not behave the same as conventional time-based charts do. In fact, the only similarity between traditional charts and renko is that both charting methodologies plot on the vertical axis.
A single brick on this type of chart represents price movement in a range of n points. For instance, you can set your chart to track 5 points, 10 points, 50 points or however many points you want. In most charting packages, it’s up to you. Note, however, that the smaller the period, the more volatile the chart will be.
For instance, a brick of 5 points will be much, much more volatile than a block consisting of 50 points.
As mentioned, each point on this type of chart is a brick. A new brick is only printed when the price of the currency pair increases or decreases by a predetermined amount. Consequently, unlike time-based charts, the formation of a new brick depends on price volatility, not on time. As we shall see, this provides the patient trader with some significant advantages.
Indeed, unlike price-time charts, these charts always consist of diagonal lines, and these lines are always moving either up or down. You won’t see the whipsawing common to price-time charts.
Because renko rarely moves horizontally, it becomes quite easy to determine the prevailing trend. When the currency pair moves strongly in a down trend, for instance, the chart will produce bearish bricks, and the downward diagonal line becomes steeper. Then, when the trend inevitably reverses, the chart begins printing bullish bricks.
The time axis on this type of chart, then, is not fixed. It expands or contracts depending on the strength, and direction of the prevailing trend. It looks like this:
• Strong trend. You will see more plotted points, or bricks.
• Weak Trend. You will see fewer plotted points, or bricks.
• No trend. No, or few, new bricks will be printed.
Remember: this type of chart will only add new blocks when the price moves up or down beyond the range of the brick size. So, if the period is 50 points, a new block will only form once the price moves 51 points away from the previous block’s opening price. Typically, a bullish block is colored green, and a bearish block is colored red. The default colors in your charting software may differ, however.
The Advantages of the Renko Chart
As you might imagine, this type of chart offers many advantages. Their main strength is that they simplify price history. This is a major advantage when it comes to trading volatile currency pairs or other markets, such as oil, metals or exotics.
What’s more, because these charts eliminate time from consideration, small whipsaw movements are also eliminated. This makes it easy to determine trend, as mentioned, but it can also make it easier for you to identify support and resistance zones.
Let’s now turn out attention to some specific advantages of renko charts.
#1 No Time Means Fewer Trades
The use of time in Forex trading is quite often arbitrary. A trader may learn from their mentor that the daily time frame is best. A scalper, meanwhile, will teach his pupil that the 1-minute time frame is preferable. Yet it’s possible to make money on both time frames. For that matter, It’s possible to make money on any time frame at all.
But because these charts remove time from consideration, they may provide an advantage to nervous traders who struggle with patience. Over-trading, after all, is a serious problem for novice traders. These charts lessen the impact of over trading by giving clear buy/sell signals. A savvy trader can even create numerous filters for this chart type, such as higher time frame analysis via a standard chart, to end up with even fewer trade signals.
As legendary trader Bill Williams pointed out, sometimes the best thing to do is to keep your powder dry.
#2 These Charts Eliminate Noise
This type of chart is much cleaner than normal price action charts that rely on time. Because these charts present much less noise to the trader, the trader can trade with higher confidence. Over time, higher-confidence trades lead to more consistent profits.
#3 These Charts are Very Efficient
With a renko chart, consolidations are filtered out. If the price moves in a range, the chart simply will not print new bricks. This eliminates useless information, which makes it easier to focus on what matters: the formation of new trends.
#4 Easier to Identify the End of the Trend
With a time-based chart, it can be difficult to tell when a trend has really ended. You may get periods of minor retraction which make you question whether the trend is over. But with this chart type, this doesn’t happen to the same degree. You can take action on the signal with much more confidence.
These charts work well with any trend following strategy because they filter out much of the noise you will see on time-based charts.
In general, renko has two potential drawbacks.
#1 Brick Settings
Before you can use a renko chart, you must decide on the brick setting. Should you use 5, 10, 50 or even 100? It’s up to you. Novice traders tend to try one setting for a while only to switch to another a few weeks later. This tendency to experiment isn’t a bad thing, but it can hold you back. Your goal should be to find a setting that offers you a balance between stability and volatility. If you set the renko too low, you’ll get a lot of noisy bricks. If you set it too high, you’ll end up with extremely long trends that you can never take action on.
#2 Renko Requires More Monitoring
Because renko is sensitive to volatility, and because it ignores time altogether, you have to sit on it more. That is to say, you’ll need to be ready to take action on a new signal at any time. In forex, prices can change rapidly. This means that Renko is most useful at longer time periods, such as 50 to 100 bricks. Conversely, then, renko tends to be less useful to day traders because the chart may produce too many signals.
Renko Paired with an MT4 System
However, renko can be a powerful ally if programmed into an automated MT4 system.
Through renko chart programming, and through backtesting, you can find the ideal renko period for the currency pairs you trade. What’s more, because this renko MT4 system is automated, you can remove human emotion from the equation completely. Your renko MetaTrader 4 system can then make trades for you while you sleep.
The system, through renko chart programming, will take signals from the chart without your intervention. Indeed, renko can be a key component of any automated trading system since it removes the noise that plagues time-based charts. Such a system is especially powerful compared to other systems because it removes the temptation to over trade and because it follows the trend no matter what.
If you’re interested in renko chart programming, and would like more information on a renko MetaTrader 4 system, contact us today!