Do you really have to consider the time or volume in your trades, or is it also possible to trade based on the price changes only? This question is the foundation of the Renko chart.
Renko chart is invented by Japanese traders too. On a Renko chart, time and volume have no role and only the price changes are considered.
Renko candlesticks look like small bricks or boxes. They have no upper or lower shadows. We can change the box size in the Renko charts. A new box will appear on the chart only when a special level of price change occurs. When the box size is set to a smaller settings, then new boxes come faster, but when the size is set to a higher settings, then a larger price change needed, in order to appear a new box on the chart.
The smaller the size, the higher number of boxes, and so more details of the price changes. The larger the size, the lower number of boxes and less details from the small price changes and noises.
Therefore, the first and most important feature of the Renko charts is eliminating the markets noise. The other important feature is filtering out the thin or non-liquid markets that have no proper and enough liquidity, and so, are not suitable for trading.
The reason of having these features is that a new Renko block appears on the chart only when there is a certain amount of the price movement. When the price goes up and down in a tight range, or when it doesn’t have enough changes (it is not liquid), then no block forms. Whereas in the candlestick and bar charts, one new candlestick or bar has to form within a special time frame, even if there is no reasonable price changes.
Below is the EUR/USD Renko chart while the box size is set to 1. Please note that there is no time frame in Renko because time is not considered in Renko charts algorithm at all. Therefore, unlike the candlestick line and bar charts, the horizontal axis of the chart (although it still shows the time), has nothing to do with any time frame and it merely shows the time that each block has appeared on the chart.
As you can see on the below chart, the distance of different years is different from each other. For example, the distance of 2003 and 2004 is longer than 2007 and 2008. The reason is that more Renko blocks are formed between 2003 and 2004.
This is exactly the same chart while the box size is set to 0.5 which means smaller boxes and so more details of the price changes. The smaller the settings, the more blocks on the chart and visa versa, because smaller settings means one block based on a smaller price change:
The above chart covers about 2 years from Sep 2004 to Sep 2006. As you see, there are some trading opportunities on this chart.
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Renko Charts Technical Analysis
The technical analysis rules are the same in the Renko charts and you can enter a trade after a support, resistance or consolidation breakout. However, there is nothing like the candlestick patterns here because Renko blocks don’t cover or engulf each other and they don’t form Dojis, Hammers and…
Renko charts are great tools for entering the volatile markets and staying away from the shallow, choppy and noisy markets, because for example a support or resistance breakout forms on the chart only when there is a reasonable price movement that has formed a support or resistance, and then a breakout forms only when the price moves strongly to break a line. Therefore, there is less change of a false breakout:
Let’s check a smaller box size and see if we can find more trading opportunities on the above chart or not.
The box size in the below Renko chart is set to 0.1. As you see, your can easily find good trading opportunities using the technical analysis rules when you use a smaller settings of the Renko chart, because it shows more price movement details:
Now, let’s compare the above chart with a candlestick chart.
The below chart is the candlestick chart that covers the same time span as the above chart. As you see, the short trade could be easily distinguishable in the candlestick chart, but it was a little hard to decide for a long position after that. Whereas the above Renko chart shows the long opportunity more clearly:
Does It Mean You Can Locate More Trade Setups Using Renko Charts?
It is possible to have more trade setups with Renko chart, but the problem is that in many cases we get in the market when it is too late and the price has already moved a lot. Regular candlesticks are real time, and you see everything on the chart right when it happens. However, the advantage of the Renko chart is that if you set it to larger settings like 1, then it eliminates a lot of noise and you will see the really strong chart patterns and setups. This is the main reason of the Renko chart invention. It was invented to eliminate the noise through ignoring the time and recording the price changes only.
This is a really good feature for the traders who are not patient enough, and so they over trade. Ranko pushes them to wait for the real trade setups and breakouts. Also, as there is no candlestick pattern in Renko, it saves a lot of learning time, and prevents the traders confusion, because learning the candlestick patterns needs time and energy to learn everything and get more experienced otherwise the weak and false candlestick patterns can easily deceive you.
If you set the Renko to the smaller settings, like what I have done on some of the charts here, then you will have one Renko box for each of the price changes, and it helps you catch all of the movements, patterns, and probably trade setups. But this is not recommended because to creates a lot of noise on the chart.
Therefore, it depends on the way you use Renko. If you set it to 1, then you will eliminate a lot of price ups and downs and noise, and you will only have the strong movements. And if you set it to 0.1 to 0.5, you will have more of the price changes, and so you can have more trade setups, but please note that more trade setups doesn’t necessarily mean more profit and money.
I cannot see any clear inverted head and shoulders on the above candlestick chart whereas it could be seen sharply on the below Renko chart.
Another period of time with the Renko chart:
The same time span with the candlestick chart:
So if you are a swing trader and you work with the long time frames like daily, you’d better to have an eye on Renko chart too. It seems it is a big help to confirm your technical analysis results.
How to Install Renko Indicator On MetTrader 4 Or MT4:
As you know, MT4 doesn’t support Renko by default. However, you can have it on MT4 as well through installation of a custom indicator.
1. Download Renko chart indicator for MT4 or MetaTrader platform: Click Here
2. Copy the indicator to the “Indicators” folder. To do that:
- Click on “File” menu at the top left of your MT4 platform.
- Click on “Open Data Folder”.
- Open the “MQL4″ folder.
- Open the “Indicators” folder.
- Copy and paste the indicator to “Indicators” folder.
3. Restart the MT4 platform.
4. Open a price chart, and then open the Navigator. Under the “Indicators” find “LuckScout-Renko”. Drag and drop it to the price chart.
You can have the Renko chart on your platform and try it for a while. Compare the trade setups you locate using your own trading system with something that Renko shows. You can use Renko to confirm your trade setups. After a while, if Renko helped you take stronger positions, and make less mistakes, then it means it is a proper tool for you. Try to use the slower settings like 1 or 80 for MT4 to eliminate more noise. This is what I recommend, specially to novice traders.
Learn about the other kinds of price charts invented by Japanese Traders: