ATR BRICK VALUE and OTHERS

 ATR Brick Value

Apart from fixed or absolute brick values and log scale brick values, it is also

not uncommon to see the 14-day average true range (ATR) being used as

brick value in Renko charts. Thus the 14-day ATR is first calculated and the

Renko chart is then plotted using that value. For example, if the 14-day ATR

of Nifty is 50, then the ATR based Renko chart of Nifty will be plotted with a

50-point absolute brick value. Since ATR is a volatility based indicator, an

ATR based brick value chart is based on the current volatility of the

instrument. However, it is better to plot percentage ATR when this method is

followed. Thus, in the above example, if the Nifty is currently trading at, say,

5,000, then a 1% log brick value chart (ATR value of 50 divided by current

price of 5,000) can be used for plotting instead of using the 50-point absolute

brick value, so that past Renko patterns become relevant for the analysis.

All the methods and analyses discussed in the book are applicable to charts

plotted using ATR based brick values as well. The logic is that ATR factors

in an instrument’s inherent volatility and plots the chart accordingly. The

problem with this kind of method is that the brick value would keep changing

as the value of ATR changes. So if you enter a trade based on an earlier

ATR-based Renko chart, how do you deal with the changing ATR value? A

change in the ATR will lead to a change in the brick value and the chart

structure. Which is why log brick values are preferred over dynamic methods

of determining brick values.

Keeping track of the price setups on higher brick values and lower brick

values is not possible with ATR brick value charts. The ATR method could

be useful when only a chart pattern is analysed on the Renko chart while the

trade is executed using some other method. I would rate this as serious under-

utilisation of Renko charts since Renko is a complete charting system in

itself, which can be used for every type of trading.

From a trading perspective, there is a very important advantage in using log

brick values. It is possible to design patterns that fit one’s risk appetite. For

example, if someone is comfortable with a 5% risk, a Renko formation can be

traded with the stop loss of not more than 5 bricks on the 1% brick value

chart. Scanners designed this way will produce outcomes where there is a

price pattern which fits into the risk parameters.

Other Methods of Plotting Renko Charts

Renko charts are plotted using only a single price and we have discussed the

methods of plotting charts both with closing price and high-low prices. A

Renko chart can also be plotted with a typical price (high + low + close). It

can also be plotted using a weighted average price, or such other calculations.

While the latter is ideal from an analytical perspective but it is difficult to

trade with it. A Renko chart of open instead of close can also be

experimented with. There can be other methods as well, but all of them come

with their own pros and cons, so one should understand a method well before

using it. It is not that one method will generate higher profitability than the others; it is the understanding of their nature and how you trade them that

will lead to success. The key is consistency.

Personally, I prefer log brick value charts plotted with closing prices on all

time frames.

Repainting

There is a common complaint of a repainting issue with Renko charts. There

can be only two reasons for a brick getting repainted. The first is when you

are using ATR as brick value. In that case, the chart will change whenever the

ATR changes. The second reason is that some bricks may disappear by the

time the period is over. For instance, if you are using a 15- minute time frame

for a Renko chart, some bricks might disappear after being printed within that

15-minute period simply because the time frame is yet to be completed. This

is similar to bar or candlestick charts except that only the last candle changes

in that format so it can be easily understood. With Renko charts, several

bricks can appear and disappear, leading to possible confusion.

Time Frame

In a traditional candlestick or bar chart, we can plot higher time frame charts

by using monthly, weekly or yearly prices. We can do that in Renko charts as

well by simply adjusting the brick value, instead of switching between

weekly, monthly or yearly prices. A weekly chart is locked at the end of the

week, but a higher brick value daily chart gets locked every day but fulfils the

same purpose.

Thus, instead of plotting charts using weekly or monthly price data, I

recommend plotting higher brick value charts using the daily price data in

order to analyse the bigger time frame picture, as follows:

■ For short term analysis, one can use a 0.25% to 1% brick value based on

daily price data.

■ Use a 1% to 3% brick value daily chart to get a medium term picture; and

■ Use a 3% to 5% brick value daily chart to get a much larger time frame

picture. .

Figure 1.18 is a Renko chart of TVS Motors plotted with 0.50% brick value



Figure 1.19 is the corresponding chart plotted using a 1% brick value. You

would notice that in this chart, brick values are more compressed and the

noise is reduced.


Figure 1.20 is the corresponding daily chart of TVS Motors plotted with 5%

brick value to get the larger picture.

You can see in Figure 1.20 that the size of the brick is increasing as the price

goes up. This is the advantage of log charts. Trend lines and other analysis

also become more logical on these charts.

For intraday time intervals, I recommend using one-minute price data for

plotting the charts. One can use 0.25% brick value for stocks. I recommend

using 10- and 25-point absolute brick values for Nifty and Bank Nifty charts

on the one-minute time frame. With experience, one can adjust these brick

values as per one’s trading style and preferences.


An aggressive trader looking for more trades can opt for a lower brick value.

A momentum trader, on the other hand, can increase the brick value in order

to ride the trend. This is explained in detail in the subsequent chapters.

Irrespective of what your trading style may be, following Renko charts will

certainly help you filter out unnecessary trades and deal better with emotional

issues and overtrading.

Brick Reversal Pattern

The change of brick from bearish to bullish, or from bullish to bearish, is

called a brick reversal pattern.

■ A bullish brick reversal pattern happens when a bearish brick is followed

by a bullish brick.

■ Correspondingly, a bearish brick reversal pattern is formed when a Now, a logical question that arises is: can one trade when the brick colour

changes? In other words, can we buy when a bearish brick is followed by a

bullish brick, and vice versa? The simple answer is yes, but, unfortunately, it

is difficult to implement this simple sounding strategy in practice. The basic

injustice rendered to Renko charts is to consider a bullish brick as a buy

signal and a bearish brick as a sell signal. Readers must realise that Renko is

not a trading system; it’s a method of charting akin to candlestick charts or

bar charts.

While a brick reversal does indicate a change, namely a reversal in the trend,

the key question from a trading perspective is the significance of the reversal.

A brick reversal is thus just a pattern, and while it can be traded effectively,

we need more information and chart analysis to see what caused the brick

reversal. We will discuss many other patterns and tools that will help us

understand how to deal with brick reversals from a trading perspective.




Now, a logical question that arises is: can one trade when the brick colour

changes? In other words, can we buy when a bearish brick is followed by a

bullish brick, and vice versa? The simple answer is yes, but, unfortunately, it

is difficult to implement this simple sounding strategy in practice. The basic

injustice rendered to Renko charts is to consider a bullish brick as a buy

signal and a bearish brick as a sell signal. Readers must realise that Renko is

not a trading system; it’s a method of charting akin to candlestick charts or

bar charts.

While a brick reversal does indicate a change, namely a reversal in the trend,

the key question from a trading perspective is the significance of the reversal.

A brick reversal is thus just a pattern, and while it can be traded effectively,

we need more information and chart analysis to see what caused the brick

reversal. We will discuss many other patterns and tools that will help us

understand how to deal with brick reversals from a trading perspective.

Brick reversal formations in higher brick value charts are obviously more

meaningful. We will come back to this discussion in Part 2 of the book, once

we have fully discussed Renko pattern analysis.

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