Use Renko Charts to Capture Big Forex Price Moves
Cory Mitchell, CMT
No single tool is going to make someone a great, or even profitable, trader. Yet certain tools may help see the market better, or help us stick to our trading plan better.
For me, Renko charts are one of those tools. Throughout my 15-year trading career, I have used profit targets to extract profit from the market. The strategy is effective, but also there is almost zero possibility of ever being in a trade for a REALLY BIG move. A profit target is an offsetting order that gets me out of the trade when the desired profit level has been reached. This profit target level is based on analysis of how that asset typically moves.
For many people, profit targets also introduce a couple of problems. You need to have a plan for when the price almost reaches your target but then reverses. You also need to be constantly analyzing your trades to see if you are setting your targets correctly—on average. Are the profit targets not being hit? That's a problem. If the price is surging past your profit target, that's also a problem because a lot of money is being left on the table.
Don't get me wrong. Profit targets are great! As I said, I have used them successfully for many years, and still use them with many of my strategies.
Yet there is also value in having strategies that attempt to capture as much of the trend as possible, without getting out at a predetermined level. This is where Renko charts come in.
If you struggle to stay in your trades long enough, or you want to capture bigger moves, or you struggle with picking profit targets, Renko charts may help. As mentioned they aren't a fix-all...they have problems too. I will discuss the cons of Renko chart a bit later, but for now, let's look at what Renko charts are, and how you can use them to capture big trending price moves.
What are Renko Charts
Renko charts only factor in price movement, not time.
They are created by boxes, which are never side-by-side, and only move at 45-degree angles.
The trader chooses a box size, say 30 pips, so a new box will form when the price moves 30 pips from the last box. The box size will vary by the pair being traded, the trader's strategy, and is a subjective assessment. We'll discuss how to pick box size a bit later.
When the price is dropping, the boxes are typically colored red or black, and if the price is rising the boxes are green or white.
In the example above, if the price is rising (series of green boxes), a new box will form when the price rises 30 pips from the close/high of the last box. In order to reverse, the price will need to move 60 pips to the downside from the last high/close. This is because there are no side-by-side boxes. So the first red box won't be confirmed until the price moves 60 pips below the top of the last green box (or 30 pips from the bottom of the green box).
The same concept applies to a downtrend. The price needs to rally by 60 pips from the low (or 30 pips from the high) of a red box in order to get a confirmed green box going in the opposite direction.
Renko charts are built based on closing prices for a chosen timeframe. If 1-minute closes are chosen, the Renko chart will look for 1-minute closing prices to create the boxes. If a 15-minute, 1-hour, or daily timeframe is chosen, the Renko boxes will only be created once those closing figures are in. This is also an important decision.
Most charting services still show you the real-time price of the asset on the Renko chart.
In the chart below, a 50 pip box size has been added to the GBPJPY, based on 5-minute closing prices. 50 pips is a randomly chosen box size and not a recommendation.
The price bottoms at 131 on the far left. That doesn't mean that the price didn't actually go below that, it does mean the price didn't have a 5-minute close below 130.50 (because then a new box would have formed).
The price then rallied and we would get our first complete green bar when the price has a 5-minute close above 132 (when a bar is not yet complete, it still shows up, but is hollow, or a different color, like yellow).
The price trends nicely with a couple of short-term pullbacks. Then the price gets quite choppy. Anyone attempting to use Renko to capture a trend would have likely lost money during this period, as the price simply didn't trend and the Renko boxes just oscillate back and forth. Finally, at the far right of the chart, another trend develops.
There is a time scale along the bottom fo the chart, but a Renko box will take however long it needs to form. The month of October takes up almost the entire chart, while November takes a small portion of the chart on the right side. More movement equals more boxes. Less movement equals fewer boxes and thus less space on the chart.
Using Renko Charts to Capture Trends
When the price is trending, Renko charts provide a simple way to stick with the trend. Don't exit until there is a reversal—a confirmed box of the opposite color.
Traders can use typical technical analysis to help identify potential turning points or the start of a trend, and then use Renko charts to stick with that trend, or a trader could simply trade based on Renko.
A new box color equals a potential trend change, so a new position could be initiated. This method can result in lots of losing trades when the price is choppy, but the positive is that the trader will be involved in every big trend that happens.
For most traders, a fusion of typical technical analysis (on a candlestick chart, or other conventional chart types) coupled with Renko could help traders stick with a big trend when it develops.
I use Renko only on certain forex pairs that I have found to trend quite well. I then found a box size that allowed me to capture the bulk of the price moves, but also minimized the whipsaw periods. Unfortunately, the whipsaw periods can't be avoided...if the price is oscillating back and forth, so will Renko charts.
With Renko charts, there is the possibility of always being in the market. When an opposite box color forms, exit the prior trade and enter a new one. The strategy will lose during choppy periods but will always capture the big moves when they happen. As mentioned, this only seems to work with certain box sizes, and some pairs tend to trend better than others.
You can see how a strategy performed by adding up all your profits and losses on the Renko chart. Add some slippage to each trade. Seeing how a strategy performed over a long period of time will also allow you to estimate the maximum drawdown, which can be used to fine-tune position size.
The GBPJPY chart below is what happened next after the chart above. A long is initiated at 140.50 once a green bar forms (it won't form until the price closes above 140.50 on a 5-minute chart). The trade lasts until a red box completes, triggering an exit of the long and a short trade at 146.50. That's a 600 pip gain. The profit and losses, in pips, are marked at the entry point of the trade. The last trade is currently progress (notice the different colored and incomplete box at the far right).
The chart clearly shows that during trends the gain can accumulate quickly...but during choppy periods the losses can mount quickly as well.
By no means does a trader need to utilize this type of strategy where they are always-in-the-market. It just highlights the ability to stay with the trend. This strategy picked up 800 pips in a couple of months and encaptures a good trending period as well as a rougher choppy period. Go back to the first chart in the article...this shows a rougher period. The strategy was not profitable during that period.
So Renko charts still have their pros and cons! They help with sticking with the trend, but if you can't handle the whipsaw period, you will need to find some method to help you avoid them or minimize the damage. Possibly this could mean if you have 4 or 5 losing trades in a row you stop using the strategy until there is a breakout of the choppy trading on the Renko chart, or you use a traditional candlestick chart to help you avoid the choppy times.
Picking a Box Size and Closing Timeframe
This subjective. There is no rule that works for every currency pair. I just eyeball the chart, and try a few different box sizes. If it is too choppy I try increasing the box size. Does that help? Then I try decreasing it, because maybe there are trends to be captured within the choppy trading.
Smaller boxes mean more trend changes and more trades.
Big boxes mean fewer trend changes and fewer trades.
As for picking a timeframe, using daily closes, for example, will delay the creation of Renko boxes, and could mean that a whole bunch appear at once. If you are using Renko for trading signals, the daily chart timeframe is useless. In the example above where we used a 50 pips box on the GBPJPY chart, imagine there is a news announcement and over the course of the day the price rises 300 pips. That is six boxes! If you use a daily Renko timeframe those six boxes won't be confirmed until the end of the day, and the price is already 300 pips and six boxes away from where it was yesterday. With a 1-minute timeframe, boxes start getting confirmed right away as the 1-minute closing prices come in, so the trader can capture those boxes of potential profit.
I use a 1-minute interval. This is because I want the Renko boxes to form quickly. If the price moves the box amount, it will get a closing price quite quickly and that box will form.
You will get fewer whipsaws using a daily timeframe, but this is deceiving because maybe the price was moving wildly during the day exposing you to massive risk, but yet by the end of the day price hasn't moved and so the Renko makes it look like nothing happened.
As with all charts and strategies, gaps and sharp price movements happen. So even if you use a 1-minute time frame, the real-time price may be different (and long gone) even seconds after a new Renko box forms. This is especially likely around high impact news when the price can move very swiftly.
The Drawbacks of Renko Charts
A few drawbacks have already been addressed:
- Not so helpful in choppy periods.
- The price has to move quite a bit to cause a reversal. This is good and bad. The good part is it helps keep us in moves until there is a meaningful reversal, but it also means we give up a chunk of profit by waiting for the reversal. I don't mind this because it is very hard to get out at tops and bottoms anyway.
This brings us to a couple of other problems. Since we are likely going to be waiting for boxes to form and be confirmed (a closing price on the timeframe chosen), we may face quite a bit of slippage by waiting for that confirmation. Assume there is a big news announcement at 8:30 AM. A new one minute time period has just started, so the closing price won't come in for another 59 seconds. The price is skyrocketing, and you will start to see boxes form, possibly many of them, but they aren't confirmed yet.
By the time they are confirmed the price could be miles away from the entry price expected. In hindsight the chart makes it look like you could have easily gotten in because all those boxes appear at 45-degree angles, but the price may have jumped inside of your 1-minute timeframe (whatever timeframe you use) resulting in you missing a good chunk of that trade.
Some may argue "Don't wait for boxes to be confirmed!" but that also has its problems. The price will move all over the place and will constantly be starting boxes it never confirms. That is the point of Renko charts—they force you to slow down and only focus on moves a certain magnitude. Unless a box is confirmed, and the price has moved that certain amount, the information is ignored.
Position Sizing with Renko Charts
Just like with any chart type, you need to set stop losses on each trade. It is also important to understand how much of a drawdown you could take in a rough period using Renko charts.
See Three Effective Position Sizing Methods for Trading Forex. If you plan to use Renko charts to always be in the market, you NEED to know what your maximum drawdown is. This is covered in the video and in the Maximum Drawdown section. If you are going to use Renko charts periodically, the 1% or fixed methods are fine, but I would also recommend incorporating the maximum drawdown approach as well.
To Use or Not Use Renko Charts
There is no need to use Renko charts, this is not an endorsement of them. Use what works for you. I have a strategy that is based on them, and I use Renko charts for that strategy. I still use conventional charts for other strategies. If they help you, create a strategy around them. If you don't like them, don't use them. But just for fun, add up what your profits and losses would be using a Renko chart (add in some slippage on each trade), and then compare that to your current approach. If you are struggling with your trading, simplifying may be a good starting point. Renko charts help simplify sticking with the trend.
For additional trading insights, see Quickly See Which Currencies are Performing Best and Worst as well as, False Breakouts are Key Trading Opportunities!
By Cory Mitchell, CMT. Join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.