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Welcome to the Renko Chart Form in which Renko charts are used to determine the following about a security:
(a) Easy identification of support and resistance lines.
(b) Easy identification of continuation patterns such as triangles.
(c) Identification of reversal patterns such as head and shoulders, triple tops, double bottoms and other classically accepted reversal patterns.
(d) Discovery of trends and their reversals that cannot be "seen" on a PPS chart.
(e) Refine our abilities to daytrade/swing a chart as to build up our accounts.
Basic Information on Renko Charts
Renko charts predate the traditional PPS chart and were developed at least four centuries ago. Grounded in the "Renga", the Japanese word for "brick", Renko charts present a representation of the PPS movement not unlike a swing or three line break chart. Unlike swing and three line break charts, the OHLC format is replaced by "bricks" which indicate the "trend" while filtering out small variations from the trend. In classical Renko charts, not subject to tricks mentioned later, a brick is drawn in the direction of the prior move if and only if the securities price moves with a particular strength/magnitude; with a strength/magnitude indicated by the brick size. Only when the price moves at least one brick size will the Renko chart add a brick -- even if it takes several days to generate such a movement! Thus, Renko charts ignore time and track ONLY the movement of the price regardless of how long it takes to register a change of sufficient magnitude/brick size.
The construction of the chart is simple -- If prices move more than the Brick size above the top (or below the bottom) of the last brick on the chart, a new brick is added in the next chart column. Hollow bricks are added if prices are rising. Black bricks are added if prices are falling. Only one type of brick can be added per time period. Bricks are always with their corners touching and no more than one brick may occupy each chart column. (Note: Some people use this coloring scheme, but others use customs colors.) It's important to note that prices may exceed the top (or bottom) of the current brick. Again, new bricks are only added when prices completely "fill" the brick. For example, for a 5-point chart, if prices rise from 98 to 102, the hollow brick that goes from 95 to 100 is added to the chart BUT the hollow brick that goes from 100 to 105 is NOT DRAWN. The Renko chart will give the impression that prices stopped at 100.
Reading a Renko Chart
The MOST important information on the Renko chart is when bricks change colors; indicating a trend change has *just* occurred. Just as in a swing chart, the change in brick color indicates a trend has established and appears stable enough to trade. (People who make swing charts using OHLC know this behavior.) Although this seems and easy way to determine trades, one must choose whether or not a one brick change is sufficient. Some people accept one brick as an entry point, but others require the confirmation of a second brick as to avoid whiplash, remorse, and traps.
Curiously, if you're into TA, all the same rules of TA apply. Look for patterns, resistance/support lines, head and shoulders, channels, double bottoms, triple tops, and other signals. All the rules you learned for PPS charts apply -- even PSAR/SAR signals. Word of warning, Fib-lines are still up for debate, but the forum will test them out and try to figure a modified method. The trick is translate the Renko findings to a PPS chart and develop a personal trading system. In general one can assume:
(a) The resistance/support in a Renko corresponds to a resistance/support in the PPS chart. The number of times such a resistance/support is tested indicates its strength on the PPS chart.
(b) Reversal and continuation patterns in the Renko chart are a lagging signal for trading the PPS chart.
(c) Channels on Renko charts reflect channels in the PPS chart; even if the PPS chart is too ugly as to see the channel. Sometimes the Renko will imply the B. Bands as a channel.
Keep in mind that classical Renko charts show the history of the PPS -- they are not predictive. Soapy Bubbles will present a method in which to introduce errors into the Renko chart as to make them predictive in Amibroker.
Parameters at Stockcharts.com's Renko Chart
There are two ways to specify the Brick Size for a Renko chart: Absolute Points and Average True Range (ATR). In addition, you can specify whether closing prices or high/low prices are used.
Absolute Points
With the "Absolute Points" method, you specify the size of each brick on the chart in points. The advantage of this method is that it is very easy to understand and predict when new bricks will appear. The disadvantage is that the point value needs to be different for high priced stocks than for low priced stocks. Typically you will need to choose a value that is roughly 1/20th the average price of the stock during the time frame you want to chart. Common values include 1, 2, 4, and 10. Another way to select a value is to choose the average volatility in the PPS and use that as the point. For example, if a stock tends to swing 0.03 per day, try that as the point size. Sometimes you'll get better resolution on trend changes.
Average True Range (ATR)
The "Average True Range (ATR)" method uses the value of the ATR indicator to determine the brick size. The ATR indicator is designed to ignore the normal volatility of a stock and thus it can "automatically" find good brick sizes regardless of the value or volatility of the stock selected. ATR with a value of 14 is the default value for Renko charts and should generate a very usable chart in most cases. If you want to find the ATR on your own, keep in mind that the ATR is the greatest of the following:
(a) The distance from today's high to today's low.
(b) The distance from yesterday's close to today's high.
(c) The distance from yesterday's low to today's low.
Just find the values and choose the largest one. That's your ATR. There are fancy ways to manipulate the ATR and that will be described later.
High/Low Prices
When using High/Low prices, it's important to note that the rules for drawing Renko charts favor hollow bricks. In other words, regardless of the current direction of the bricks, you first check to see if any new hollow bricks can be added to a chart and, if they can, you then stop without looking at the lows of the day.
If you're using High/Low and points for your chart (which you should), the ATR(14) from SC.com will help you.
Long and Short Charts
When choosing the timeframe for the Renko chart, keep in mind the Renko chart ignores time. Thus a long and short term charts will perform the same. In addition, five minute Renko charts may be utilized for daytrading.
Renko Methodologies and Abuses to Help Traders
Mr. Bigz's (BI) Indicator Method
The BI indicator (a creation of Mr. Bigz) is a clever convolution of TRIX(3,3) and Renko Momentum displaying the triple exponentially smoothed moving average of a closing prices over a given time interval; whether it be daily or a matter of minutes. The elimination of whipsaws is established via EMA crossings and is explained in the above chart. As a system, the BI provides a complete trading system suitable for scanners and daytraders alike.
Soapy’s Predictive Error Method (PEM)
TBA
The One Block SWC System
Note: The sell signal should occur only if the STO is over 80 or 82. Anything below that isn't quite a real sell signal unless the stock is diluting or bad news becomes public.
The Two Block ADX System Requiring Confirmation
Note: It's nice to wait for confirmation, but sometimes you will miss out on some of the profit.
Soapy's CCI Method (Risky as Hell)
Note: I've burned myself with this method a few times and found it's a big board method. Nonetheless it does work on the OTCBB/PK for securities with healthy volume and a small short position. Also the CCI method may issue an early sell if the securtiy rides the upper B. Band for a long period of time. In that case, use the SWC method. Simplegreen notices that if you plot Slope(20) under the CCI(20)/CCI(2) signal, you can filter out false sell signals by sticking with the security when the Slope(20) is relatively high and stable (nearly horizontal line over 0). Even if the CCI(2) drops while the Slope(20) remains high, stay in. Once the CCI(2) and Slope(20) drop in unison, that's a truer sell signal. Another sell signal exists when %K crosses under %D on the Full STO since it seems to slightly lead the CCI sell signal.
DRAFT: Setting up the Standard Renko Chart (SRC)
The SRC has the following settings:
(a) One year timespan for daily charts. If you use a intraday chart, choose a timeframe that fills the chart nicely with data.
(b) Select ATR(14).
(c) The chart should have the CCI(20)/CCI(2) setup as discussed earlier in the iBOX.
(d) The chart should have the FULL STO for sell signals.
(e) Slope(20) or Slope(10) should be included as to filter out false sells on the CCI method.
(f) If it's a 1,5,10,15, or 60 min chart, include the RSI(2) for buy/sell signals.
(g) Some people like to use the Trix(3,3) and this is optional.
Educational Materials
EQUIS: Technical Analysis from A to Z
Author: Steven B. Achelis
RapidShare Link:
http://rapidshare.com/files/110945475/Technical_Analysis_From_A_To_Z__By_Steven_B_Achelis_.pdf.html
Stockcharts.com Reference on Renko
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:renko
Other Websites For Information
http://www.investopedia.com/terms/r/renkochart.asp
http://www.marketscreen.com/help/atoz/default.asp?hideHF=&Num=94
http://www.markettide.com/html/renko.html
http://www.weboma.com/renko-chart-how-to-trade-using-renko-charts/
http://www.day-trading-strategy.com/Renko.html
http://www.stator-afm.com/renko.html
http://www.traders.com/Documentation/FEEDbk_docs/Archive/082007/Abstracts_new/Duddella/duddella.html
Here is a great video explaining the Renko system!!
http://breakpointtrades.com/CamtasiaFiles/Renkosystem/Renkosystem.html
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