Most of the traders noticed that traditional way of representing forex charts - Japanese candlesticks - have a lot of useless information on the chart, especially when it comes to squeezed timeframes. That’s especially noticed by daily swing traders who have enough patience to wait several days before taking profits from trading positions, or target certain ranges when holding a deal. Intraday traders might struggle from fake breakouts or long shadows and whipsaws, which cause false trading signals from many technical indicators. Traders are forced to seek additional filtering by complicating their trading strategy and algorithms.
Renko Charts is based on a completely different chart view, which aims to smooth unnecessary market noise and inform a forex trader when a significant price action happens.
What are Renko charts?
Renko Chart consist of blocks or chart with equal size, and they do not have a connection to exactly same time periods. trading renko charts have two colours - green (bullish) and red (bearish). Those chart might or might not have so-called wicks, an analogue of candlesticks shadows, depending on adjustable settings. The main parameter for Renko chart view is Average True Range (ATR), measuring the distance which an asset price must move to form a new chart.
What is the difference between Renko chart and Candlestick view?Both views are shown on the screenshots below for the same currency pair and equal timeframes and periods.
The visual difference is obvious, and the Renko Charts has much more squeezed representation, ignoring many useless price swings and false movements. At the same time, major trends and technical retracements are still clearly visible. One of the main targets of Renko Charts Forex view is to simplify the market analysis in terms of determining trend directions and possible correction depth.
History and background
A Japanese word “renga” means chart. The main interpretation in relation to forex trading is that every strong trend consists of equal blocks like every wall is built with equal charts. The main idea to create such a chart view was to smooth the market noise and show only significant price action, while the size of the chart (ATR) can easily be changed depending on what distance in pips a trader considers as significant. Steve Nison was the first person to present forex Renko Charts publicly several decades ago as he was also the trader who made Japanese candlesticks famous and popular. Since then, Renko strategy was developed and proved its efficiency and profitability.
How to use Renko charts
Renko charts are formed with an example of ATR at the level of 30 pips (four-digit quotes for major currency pairs). The size of Renko bars is always the same, while the period to form them is always different. Traders should note that the next block is formed when the asset price moves 30 pips compared to the previous charts close price. Sometimes, the distance might range 32 or 34 pips as those fluctuations are not counted in Renko strategy. Therefore, the open price for the next bar with the same colour is always equal to the close price of the previous one.
Renko Chart will look like this for the same period:
The chart has two bars with the same date on May 31. That happened because the price went more than 60 pips (double the ATR size). Thus, what matters for the forex Renko chart view is the price action but not the time it takes.
If you like this strategy, you might also be interested in this Parabolic SAR Trading Strategy
When a Renko chart changes colour?
That’s a crucial question. In order to change the sentiment from bearish to bullish (or vice a versa) and to change the colour of the Renko bar, the price must go a distance of at least two times the ATR size. For example, after a strong downtrend, EUR/USD bounced back up for 226 pips compared to the previous red bar close rate. As a result, a green chart was formed. If the same example had a bullish retracement of 195 pips, then no green or red bar was charted.
Why using Renko chart with wicks?
Wicks or shadows on forex Renko charts bring additional information to forex traders as they indicate that a price swing with a range less than ATR occurred in the opposite direction during the chart period. Renko trading strategy becomes more effective with wicks as it helps to determine the possible stop-loss range in case of sudden retracement and short-term rebounds during a trend.Traders can add or remove wicks from the chart by clicking one button in graph settings:
How to setting Renko charts?
Before setting ATR size, traders should determine several key factors influencing the best renko strategy in relation to individual goals. Also, the underlying asset matters as different currency pairs have different volatility, and traders should adapt depth of retracement and false breakouts for any particular financial instrument. What’s more, the timescale, on which traders focus the trading process, is also important as it’s hard to imagine EUR/USD moving for 200 pips in one hour, for instance. Another useless ATR would be chosen on GBP/JPY daily chart with 10 pips chart size.
How money management rules affect ATR size?
Questions to optimise Renko chart strategy:
- What is the profit/loss ratio preferred?
- How deep stop-loss orders can speculators afford for trading positions?
- What is average take-profit target?
- What is the risk-appetite level?
- Which currency pairs or commodities are traded the most in strategy portfolio?
- What is the relation of average positions trading volume to the overall account balance?
Examples of selecting optimal chart sizeCurrency pair: EUR/USD Timeframe: Daily Average period of holding positions: 3-7 days Stop-loss: 60 pips Take-profit target: 150 pips
ATR: 50 pipsCurrency pair: GBP/JPY Timeframe: Daily Average period of holding positions: 5-10 days Stop-loss: 120 pips Take-profit target: 300 pips ATR: 100 pips
How to read Renko charts?
As long as the ATR calculations refer to the previous bar close price, the Renko chart is lagging in terms of technical analysis. A new chart is formed only after the asset price moved for a certain distance, and closed the period above round-figure level. Another concern is that the change of the block colour does not guarantee a trend reversal but shows a deep retracement compared to the ATR value. Those are the disadvantages of Renko Chart Strategy.
How to determine support or resistance?
On the other hand, Renko charts cut unwished price swings and false whipsaws from the chart, leaving the useful information for a trader. The main goal is to find the best relation of ATR size to an individual forex trading strategy. At the same time, strong resistance and support levels are clearly visible thanks to the simple view, and forex traders can take advantage of the Renko Chart in case if they have enough patience and they do not rush to catch every fluctuation. Choosing a correct timeframe and graph period is also crucial.
Finding reversal signals
A strong reversal signal comes when bars change the colour four times in a row with a presence of wicks as, in this case, bulls or bears obviously lack the momentum to continue the trend in the same direction, struggling to move rates higher or lower. Additional filtering might be useful to confirm trading signals by such technical tools as oscillators (Williams %R, Stochastic, RSI), which could optimise a renko chart forex trading system.
Best indicator to use with Renko
One of the best ways to use Renko Charts is a simple combination with RSI oscillator. The main target for the secondary technical tool is whether to confirm or deny the trading signal coming from the action. Relative Strength Index not only shows overbought and oversold levels, which are not indicated by charts but also points to bearish or bullish divergences when the market action does not come in accordance with the technical analysis. For example, if the rate continues declining with lower lows on the graph, but RSI draws higher lows, then a strong buy signal occurs. A different condition happens when Renko bars change colours, indicating a potential reversal, while RSI is hovering around 50%, confirming uncertainty between the bulls and bears, and denying the possible change in the trend’s direction. An example of a Renko charts forex combination with RSI is shown below.
Renko charts by Jide Ojo
Renko strategy by Jide Ojo became one of the most effective systems thanks to a simple algorithm, price-driven trading decisions, as well as the absence of any additional technical indicators, misleading the analysis. It can be easily adapted to any currency pair, but when it comes to the timeframe choice, the best option is a daily chart and swing daily trading approach. That requires a certain level of depth in the relation of the average forex deal volume to the overall account balance. At the same time, stop-loss orders have quite a large distance, as the Renko Charts is looking for strong trends, ignoring comparatively small price fluctuations. Here is an example with an impressive performance.