Renko Chart Patterns And Strategies: A Guide To Noise-Free Trading

What is a Renko trading strategy? Here is a simple example for you to understand it.

Can you recollect feeling overwhelmed by the constant "noise" on a standard candlestick chart? A candlestick chart moves dynamically. The prices constantly move up and down, creating confusion about the true trend. Aspiring traders might struggle with such volatile movements.

But there is a specific charting technique to solve this exact problem. This technique is the Renko chart. It ignores time and focuses solely on price movement.

Let us discuss what a Renko chart is and the Renko trading strategy in detail.

What Is A Renko Chart?

A Renko chart is a type of technical analysis chart. Instead of candles or bars, the Renko chart is a technique that constructs "bricks.”

Are you wondering where the word “Renko” has come from? The name “Renko” comes from the Japanese word "renga," meaning “brick.” It is not like the traditional charts that plot price against time. The Renko chart plots price against price movement.

Traders can use these charts to filter out minor price fluctuations. A new brick can form only when the price moves by a specific amount, also known as the "brick size." So, if the price moves less than this size, the chart remains unchanged.

This unique feature can help you see the broader market trend without distractions.

How Do Renko Charts Work?

It is simple to understand the mechanism of a Renko chart. You can select a brick size, say, 10 points.

• If the price rises by 10 points, a green (or white) brick appears. A series of green bricks rising diagonally indicates a strong upward trend.

• If it drops by 10 points, a red (or black) brick appears. A series of red bricks falling diagonally shows a downward trend.

Moreover, the bricks can never stand next to each other. They would always form at a 45-degree angle to the previous one.

But time plays no role here. One brick might take an hour to form. However, the next brick might take three days. Thus, the Renko chart moves only when the price moves.

A Solid Renko Trading Strategy

Generally, traders employ a specific Renko trading strategy. With this strategy, traders can capitalise on a few clear trends. The Renko chart filters noise. So, trends appear smoother and more sustainable. Here are three commonly used strategies:

1. Trend Following: This is the most common approach. You can enter a trade when a brick changes colour and confirms a new direction.

For instance, if a red brick series ends and a green brick forms, it would signal a potential buy entry. So, you can stay in the trade as long as green bricks continue to appear.

2. Support and Resistance Breakout: Support and resistance levels are often easier to identify on Renko charts. Prices may test these levels several times.

A breakout can occur when a brick closes decisively beyond this level. Usually, traders watch for this confirmation to enter a position.

3. Moving Average Crossover: Combining a moving average with Renko charts can enhance the Renko trading strategy.

You can add a 10-period or 20-period EMA (Exponential Moving Average) to the chart. The “Buy” signals occur when the price bricks cross above the EMA. Similarly, the “Sell” signals trigger when they cross below it.

Renko Chart Patterns

The Renko chart and candlestick chart have certain similarities. Just like candlesticks, a Renko chart displays distinct patterns. These patterns can provide reliable signals due to the lack of noise.

• Double Top and Double Bottom: A double top looks like an "M" shape. A bearish reversal is its signal. Similarly, a double bottom resembles a "W" shape and suggests a bullish reversal. These patterns can appear much cleaner than on other charts because Renko bricks are uniform.

• Head and Shoulders: This classic reversal pattern also appears on Renko chart layouts. It consists of a peak (shoulder), a higher peak (head), and another lower peak (shoulder). When the “neckline” brick breaks, it typically provides a strong sell signal.

• Trend Reversals: The colour change is the simplest pattern. A specific two-brick pattern might signal a reversal. However, if a long trend of green bricks suddenly creates a red brick, it marks a potential exit or reversal point.

Advantages For The Modern Trader

So, why should you use a Renko trading strategy? Clarity is the primary benefit of using a Renko chart pattern.

The Renko chart can remove the clutter of wicks and shadows found in candlesticks. You can stick to your plan without reacting to insignificant market wiggles with this chart.

Furthermore, traders can also find it easier to set stop-loss levels with this strategy. You can simply place your stop below the previous brick or the recent swing low.

The Bottom Line on Renko Charts

For accessing Renko chart patterns, you need a platform that can support this charting style. Most advanced trading platforms offer Renko chart options. But remember, Renko charts filter out minor price movements, which can delay entry and exit signals. They ignore time and volume, potentially causing traders to miss important market context. So it is always good to use them as a complementary tool alongside traditional charts rather than a sole analytical method.

Sources:

tradingview
chartschool