Crude WTI Candle Chart Versus Renko Chart

Renko What are they? • Created in Japan – been used for a very long time! Now technology has allowed really in only the last few decades for this sort of chart to be explored in the West. • It is thought to be named from the Japanese word for bricks, “Renga". • Renko charts use price “bricks” that represent a fixed price move. They move up or down in 45 degree lines with one brick per vertical column. Because of this unique approach to charting, it creates some great analytical applications for trading. • They completely remove time from the chart and focus only on price moves – a concept sometimes very tricky for the western mind to get their heads around! 1 An example –NY Cocoa (Charts: TradingView): 2 Basics: • Similar to Point & Figure charts. Instead of X-Columns and O-Columns, Renko charts use price “bricks” that represent a fixed price move. • Bricks are sometimes referred to as “blocks” or “boxes.” • They move up or down in 45 degree lines with one brick per vertical column. • Bricks for upward price movements are hollow (White / Red) while bricks for falling price movements are filled with a solid colour (typically black) – but you can create your own colours (no fixed rule here). I use black and Red. • This type of chart is very effective for traders to identify key support/resistance levels. • Trade signals are generated when the direction of the trend changes and the bricks alternate colours. • For example, a trader will sell an underlying asset when a black brick is placed at the end of series of climbing Red bricks. • Since this type of chart was designed as a way to follow the general price trend of an asset, there can often be false signals where the colour of the bricks changes too early, producing a whip-saw effect. 3 Construction: • Renko charts are based on bricks with a fixed value that filters out smaller price movements. • A regular bar, line or candlestick chart has a uniform date axis with equally spaced days, weeks and months. This is because there is one data point per day or week. • Renko charts ignore the time aspect and only focus on price changes. If the brick value is set at 10 points, a move of 10 points or more is required to draw another brick. Price movements less than 10 points would be ignored and the Renko chart would remain unchanged. Crude WTI Candle chart versus Renko chart: 4 Setting the brick size in a chart: Getting the brick size: commonly 3 methods: Fixed Value: • Means a brick size will remain constant at that size and therefore will not factor in price volatility / range to the asset. Average true range: • A non-statistical method and very simple and straight forward to apply. • Use the standard 14 day set up or can manually set how you like. • Takes into account the volatility and movement of any assets price. • Depends how sensitive you want to go but you could take the ATR / 2, ATR /4 for example and use that as your box size. Getting the right box size is a crucial process. Things to consider: • Do you have a long / short term view? • What sort of moves do you wish to isolate? • How sensitive do you want to get? • What have past prices done? • What drawdowns are you prepared to accept? Percentage of the price: • Take a fixed % level and apply – maybe better than say the fixed value as will evolve with the change in the levels of the price. 5 Example of brick size setting using the fixed and ATR approach on WTI Crude Oil (Charts: TradingView): On the left a fixed $2 brick approach and on the right an ATR/4 approach 6 Uses: • Trading by itself • Filtering out trading noise • Extremely useful for spotting support and resistance and trends Crude WTI with a 30 period ATR setting: 7 Use Of Indicators On Renko Charts: Due to the advancement of technology and charting software you can now seriously enhance your Renko analysis even further and create some brilliant trading strategies. • Can use indicators in conjunction with Renko charts to improve results. Below, is a WTI Renko chart with a 10 period moving average, Bollinger bands and Fibonacci: 8 Stops: Can you use stops on Renko charts? Yes: Basic rules: • Use levels of support and resistance • Use indicators e.g. moving averages, bands etc. • You can trail your stops a number of bricks or behind significant price levels. • You can use the Historical Volatility calculator to set stop levels (you’ll learn this on the Trade Management module.) NOW: Move on to Kagi charts 9.

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