How to use Renko charts to improve your technical analysis
Among the different price based charts that are independent of time, Renko charts are often overlooked. As a price chart that is independent of time, Renko charts offer the technician a unique view into analyzing the data and for charting the markets.
Due to the unique way that Renko plots prices, (such as bricks) trading this chart type is a lot easier with indicators or even with just price action based technical analysis.
In this article, we look at how Renko charts can help traders to make more informed decisions as far as technical analysis is concerned and also point out both the pros and cons of using Renko charts.
The basics of trading with Renko charts
Candlestick charts, line charts and bar charts are some of the most commonly used chart types. These conventional charts tend to plot a new bar, new candlestick or a new market after 1 day, 4 hours, 1 hour, 30 minutes and so on (based on time). But Renko charts are plotted when price moves a certain amount of pips or ticks in one direction or the other. This brings certain uniqueness to Renko charts. One could of course argue that the way Renko charts plot price is similar to that of the Point and Figure charts.
But, the main difference between Renko charts and other time-independent chart is that with Renko charts the bricks are plotted one after the other in a new column, unlike PnF charts which are column based and used to depict bias. At the same time, the open/close values makes Renko charts easier to be traded with both indicators as well as price action methods. Here’s more on what are Renko charts.
What are the benefits of using Renko charts?
1. No arbitrary use of time
One of the big differences when Renko charts among other chart types is the time factor. This means that the impatient trader will have to end up waiting for the right signals and not force into trades. The Renko chart shown below shows how the price action is plotted with the horizontal lines depicting the times/days.
You can see that some days volatility can lead to strong price action, while on other days, price barely moves.
Traders who want to improve some aspects of their trading such as patience or being impulsive will find that trading with Renko charts can be a great way to build up some patience while trading due to the nature of the Renko charts that are plotted. And yes, this also helps in keeeping the winners running and cutting the losing trades quickly.
2. Renko charts can eliminate noise
Renko charts are not hard to miss because they are visually cleaner to look at and show trends in a more clean way compared to Heikin Ashi charts. Therefore, Renko charts are more preferred by traders who want to focus purely on the trends and act upon it as compared to candlestick charts where the noise depicted by the high and low in prices can lead to stop hunting thus making their trading more profitable.
3. Renko charts offers more efficient technical analysis
Because of the rather “noise-free” outlook on Renko charts, conducting technical analysis is a lot simpler. This also means that price consolidations, rallies, trends are easier to spot.
Traders will find that studying technical patterns on Renko charts is easier compared to using any other chart types including line charts or candlestick charts. For example, many traders tend to struggle identifying higher highs and lows in prices. But this can be easily done when trading with Renko charts as outlined in the chart below.
4. Long term trend trading is easier with Renko charts
For long term swing traders, Renko charts will be a great way to trade because of the nature of the way Renko charts plot price and thus trends. Furthermore due to the absence of time, swing traders are well complimented by this chart type. Of course, being disciplined and having patience is one of the key aspects which is something that should be remember when using Renko charts for technical analysis or for swing trading.
Simple things such as buying the dips in the rally or selling the rallies in a downtrend can be easily achieved using Renko chart analysis.
Are there any drawbacks of trading with Renko charts?
1. What brick size should you choose?
One of the main drawbacks, (although I wouldn’t call this a drawback) is in understanding what Renko brick size to use. While it takes a bit of experience in figuring out the right Renko box size to trade with, the larger question is on the technical aspect of the analysis.
For example, Trader A might be analyzing the E-Mini S&P500 futures chart based on a 0.25 brick Renko chart and here, they find rising wedge pattern to trade. On the other hand, Trader B might be looking at the very same S&P500 Renko chart but with a 0.50 brick Renko chart which could show them that the previous bullish inverse head and shoulders pattern still had some room left to go.
This potentially puts the trader at odds as they wouldn’t know which of the two Renko box sizes would be idea. It is not surprising then that one of the most commonly asked questions among Renko traders is what is the right Renko box size to use. Sadly, there is no straight forward answer to this.
A small box Renko chart will show you more data and could potentially increase the noise. It might be useful to trade the short term markets but the larger Renko chart size will show you completely different picture. A simple way to avoid this is to look at using the ATR as a way to find the ideal Renko box size.
Day traders might be required to watch charts closely
With day traders who prefer to scalp the markets during the day, trading with Renko charts means that they need to closely watch or babysit their trades. Because Renko charts are sensitive to volatility and the fact that the day trading chart settings are usually smaller bricks, they can be more noise than usual.
Secondly to be able to successfully make a profit trading with Renko chart, day traders must book profits wherever the markets give them and quickly build a decent bankroll.
Are Renko charts worth trading?
While Renko charts can be overlooked and in most cases, misinterpreted this custom chart type can help the average trader to find for clues and chart patterns that might otherwise be missing. Renko charts, because of the fact that they are independent of time can also help a trader to build patience in their trading and also minimizes the risks of overtrading which is one of the biggest reasons for retail traders to lose money.