What is Renko Charting

Renko charting is a tool that represents price movements by using bricks. Renko is the Japanese word for brick. If a price has moved higher by a prescribed amount, we add a new brick. We can select the color; it is usually green, white, or gray. If the price has moved lower by a prescribed amount, a new block, whose color is usually either black or red, appears in the opposite direction.

The computational logic for constructing a Renko chart, shown here and illustrated as a flowchart in Figures 8.1 and 8.2, is used to create Renko charts in most programs. It follows the rules set forth in the book Beyond Candlesticks, which we discussed in Chapter 2.

The essence of Renko charting is that each brick reveals, at various time intervals, key information on market sentiment. Renko bricks become

Figure 8.1 Renko Construction Logic

Source: Abe Cofnas and Sridhar Iyer

Figure 8.1 Renko Construction Logic

Source: Abe Cofnas and Sridhar Iyer weapons of reconnaissance and detection that allow the trader to identify threats to the profits he has gained. Why is this important as a tool for improving trading exits and capturing more profits? The answer is that by setting Renko bricks to a small or microlevel price increment, if a pattern results, even at a very small increment, this pattern will enable the earliest possible detection of a change in sentiment. The trader needs to detect such changes so that he can capture and protect the profits he has achieved. In currency trading, for example, a few seconds can be enough to wipe out all of the pips gained, and the price can easily reverse into negative territory. Using Renko charts, the trader gains

Figure 8.2 Renko Construction Supplemental Logic

Source: Abe Cofnas and Sridhar Iyer

Figure 8.2 Renko Construction Supplemental Logic

Source: Abe Cofnas and Sridhar Iyer the ability to quantify the persistence of sentiment. If bullish sentiment is prevailing, the trader will be able to detect a bullish pattern even at the micro level. Depending on the trading instrument, we will see that the micro level of trading can be one minute or less. When using Renko charts, bullish sentiment is easily recognizable as a sequence of bullish (green, grey, or white) bricks. If bearish sentiment is prevailing, a descending series of bearish bricks, easily recognized by a black or red color, will appear. Detecting a change in the persistence of sentiment is the key to getting out before profits disappear.

We can see in Figure 8.3 the dominance of bullish sentiment. The bricks move upwards nearly uninterruptedly in an obvious bullish pattern. Now, let's take a closer look. We can see that the bullish run-up has intermittent interruptions with bricks reversing down. The first reversal was a one-brick reversal, followed by a four-brick reversal, a two-brick reversal, and a one-brick reversal. Finally, we see a five-brick reversal.

RENKO CHARTS CONSTRUCTION

LOGIC

Renko charts construction uses the following series of formulae:

Brick Size

Brick size in basis points * 0.0001

Number of Bricks

FLOOR(ABS(Close Price - Parent Close Price)/(Brick Size))

Brick Color

IF (Close Price GREATER THAN Parent Close Price AND #Bricks

GREATER THAN 0) THEN Grey

ELSE IF (Close Price LESS THAN Parent Close Price AND #Bricks

GREATER THAN 0) Then Black

ELSE <no color>

Next Black Brick

IF (Current Layout are Grey Bricks) THEN

Next Grey Brick position recorded for the Parent Close Price +

((#Bricks - 1) * Brick Size)

ELSE IF (Current Layout are Black Bricks) THEN

Next Black Brick position recorded for the Parent Close Price -

(#Bricks * Brick Size)

ELSE

Next Black Brick position recorded for the Parent Close Price

Next Grey Brick

IF (Current Layout are Grey Bricks) THEN

Next Black Brick + Brick Size

ELSE IF (Current Layout are Black Bricks) THEN

Next Black Brick - Brick Size

ELSE Next Grey Brick position recorded for the Parent Close Price

User Input:

Accept user input or set default Brick Size.

Base Construction Logic:

1. Read Base Date and Base Close Price.

2. Read Next Date and Next Close Price.

3. Calculate Brick Size.

(continued )

Renko Charts Construction Logic (continued )

Renko Charts Construction Logic (continued )

The challenge is to determine what level of reversal provides the trigger to get out of a position. Should the trader get out at the immediate appearance of Renko bricks of a reverse color? The answer to this question can be significant in many ways. First, the answer will reveal the psychological disposition of the trader. A very skittish

Figure 8.3 Renko Chart Showing Dominant Bullish Sentiment

Source: Chart copyright www.ProRealTime.com

Figure 8.3 Renko Chart Showing Dominant Bullish Sentiment

Source: Chart copyright www.ProRealTime.com

trader will get out on the first appearance of a brick of reverse color. A one- or two-brick reversal is natural and is part of how the price action vibrates. Three bricks reversing would be the threshold at which the trader who wants to protect profits would lighten up or get out. Therefore, as shown on the chart in Figure 8.4, the trader would exit half of the position on the appearance of four bricks, and the rest on the appearance of five bricks. These rules make sense when the context is intrahour and intraday trading and the trader is looking for high-frequency moves that will let him capture small amounts.

These Renko exit rules provide a nearly zero tolerance for having a profit turn into a loss. Once a position becomes profitable, the concept is never to allow the position to turn into a loss. It doesn't matter if the original limit or target is much further away. The original target reflects a hypothesis that market conditions anticipated by the trader will be fulfilled. In contrast, Renko chart-based trading is a pure reaction strategy for profit protection. This strategy follows a simple dictum: Never let a profit turn into a loss.

Exit Remaining Position on 5 Bricks

Exit Remaining Position on 5 Bricks

Bullish Sentiment

Sentiment

Bullish Sentiment

Exit 1/2 Position on 4 Bricks

Sentiment y

Figure 8.4 Exit Strategies Using Renko Block Reversal Levels

Source: Chart copyright www.ProRealTime.com

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