RENKO SYSTEM FOR FOREX TRADERS

  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 applicab

In the earlier examples, we discussed the plotting of Renko charts using absolute brick values, such as 5 or 10. Actually, Renko charts can be plotted with any number. But often a chart moves in a wide range which makes defining the brick value difficult. Take, for instance, a stock like Aban Offshore that was trading at 5,000 in January 2008 and subsequently crashed to 300 in March 2009, and then traded below 200 in January 2016. A brick value of 50, when the stock was trading at 5,000, would have represented 1% of the prevailing price. But if the chart were plotted with the same brick value when the price had dropped to 200, the brick value of 50 would represent 25% of the prevailing price. This example illustrates the problem associated with using absolute brick values for Renko charts, especially when studying a long term chart. There are many examples of stocks moving in a wide price range where it would be illogical to use a single brick value to sensibly capture the price action

Thus far we have plotted Renko charts using closing prices. As observed earlier, Renko charts can’t be plotted with only one price. A. W. Cohen made a remarkable advance in the field of Point & Figure charts when he devised the high-low method of plotting such charts in his brilliant work in the late 1950s. The same method can be used for plotting Renko charts as well. Instead of the closing price, the high and low prices of a particular period can be utilised for plotting a Renko chart. To plot Renko charts with this method, either the high price or the low price of a period needs to be considered. The rules are as follows: ■ If the price forms a new high and qualifies for the next bullish brick, the low price is to be ignored and a bullish brick is to be plotted connecting the high prices. ■ If after forming a bullish brick, the price doesn’t form a new high price that qualifies for a bullish brick, then check if the low price of that period fulfils the criteria for the formation

  The ninth price (see Table 1.4) triggers a reversal from a bearish to a bullish brick as the price moves back above 120. The next bullish brick level is 130, and the subsequent bearish brick level is 100. The eleventh and twelfth prices remain between the bands, so no bricks. The thirteenth price warrants plotting a bullish brick as the price moved above 140. The fourteenth price doesn’t allow plotting. Table 1.4 summarises the status of the plotting thus far, and Figure 1.10 is the resultant Renko chart . If you have followed the logic behind the plotting so far, the rest of the sequence should be easy to comprehend. The remaining price action is illustrated in the chart in Figure 1.11. The chart shown in Figure 1.11 is actually based on real time daily closing prices of Hindalco between 2013 and 2014. Figure 1.12 is the chart showing the same.

As mentioned earlier, Renko charts are categorized as noiseless and what makes them so is the appropriate selection of the brick value. In the example in Figure 1.7, the brick value used was 5 points, which is the difference between each brick.The brick value selected defines the price action which the user considers is significant enough to be captured in the chart. In Figure 1.7, for example, a brick will be plotted only when the price has moved by at least 5 points, or multiples thereof. So if price moves from 100 to 105, a bullish brick is formed. A brick will not be formed if the price is even one tick below 105. Accordingly, if the price is at 104, the Renko chart will not plot anything. Thus, the defined brick value also determines the frequency of bricks and the noise that we want to eliminate. Renko charts can be drawn by using different brick values but the principle remains the same. Later, we will discuss how best to decide what the appropriate brick value should be. Before

Let us begin by understanding how Renko charts are constructed. This is a most important and fundamental aspect. Readers are often more interested in immediately getting to the trade setups; they don’t focus enough on the basics and struggle later in grasping the nuances of trading strategies. I urge you to spend enough time in understanding the basics before moving on to chart patterns and trading. The method of plotting Renko charts is slightly different as compared to the plotting of traditional candle or bar charts. Renko charts are constructed, or plotted, by connecting two prices. The method is explained step-wise below. Figure 1.3 is the image of a simple line chart that is drawn by connecting successive closing prices. In the chart in Figure 1.3, the closing prices at 100 and 105 are connected by a line. Instead of connecting the closing prices with a line, a Renko chart connects the two prices by drawing a box as shown in Figure 1.4. The box drawn by connecting the two prices

 Renko Charts Renko is a charting method that belongs to the “noiseless” category, i.e. a chart which is free of relatively minor price moves. Apart from Renko, other noiseless charting methods include Point and Figure, Line-break and Kagi. Renko charts have their origins in Japan where they were used during the 19th century. They were introduced to the rest of the world by Steven Nison who discussed this methodology in his book, Beyond Candlesticks. In Japanese, Renko means brick; that is why Renko charts are also known as brick charts. A Renko chart is categorised as noiseless because it eliminates insignificant price action. Also, the Renko chart is a one dimensional chart because its plotting only takes price into account. On the other hand, popular charts, such as bar or candlestick, have two dimensions — price and time. In two dimensional charts, price is plotted on the Y-axis and time on the X-axis. A new price point gets plotted on the chart when the specified time passes by, i

  Technical analysis can broadly be defined as the study of historical price action of a financial instrument, commodity, currency, etc. that helps in arriving at a reasonable conclusion about its prevailing demand and supply equation. The following are the basic tenets of technical analysis according to the classic work, Technical Analysis of Stock Trends by Robert D. Edwards and John Magee:* 1. Stock** prices move in trends, and a trend is deemed to continue until it gets reversed. 2. Stock prices are determined by the interaction of demand and supply, and the shifts in demand and supply cause reversals in trends. 3. The price discounts everything. Shifts in demand and supply can be detected in charts. 4. Price history and chart patterns tend to repeat themselves. Popular Charting Methods There are many ways to capture, or chart, the historical price movement of a financial instrument. The popular charting methods include line chart, bar chart and candlestick chart. Figure 1.1 explai

  Profitable Trading with Renko Charts One of the oldest and most popular Japanese charting methods, Renko can be used to profitably trade all types of financial markets and instruments — and over any time frame. Renko charts offer traders many unique and unmatched advantages over other charting methods: ■ Renko charts are simple to use ■ Trends are easier to identify in Renko charts since the price is always either clearly bullish or bearish ■ Due to their uncluttered appearance, significant tradeable patterns are much easier to spot in Renko charts ■ Being objective in nature, entry and exit signals are clearly defined in Renko charts, making it easier to trade profitably ■ By eliminating insignificant price action, Renko charts help traders control overtrading — one of the biggest sources of trading losses. This comprehensive book provides step-by-step guidance, from the basics of Renko charts to advanced methods of analysis and trading, keeping in mind Indian market characteristics