As many good traders know, it is important to view a potential swing or
position trade on various time-frames. Say for example you're trading
daily charts. It's worth your time to look at the weekly charts for more
languid price patterns that may offer tradeable psychological break
points. Or if you're swing trading 60-minute charts, looking at the
dailies for possible nearby support and resistance or Fibonacci levels
would be helpful for stop loss placement so you don't get whacked.
It
can be equally helpful to view markets through different types of
charts. You don't want to over analyze the markets (paralysis by
analysis), but what you don't see with a chart filled with high, low,
open, close, time and volume data you might see if you eliminate a few
of those factors.
(Click on images to make larger)
Renko
charts are a Japanese style of charting that focuses solely on price
moment while ignoring the passage of time and volume. They fall into the
same category as Point and Figure, Kagi and Three Line Break charts.
Renko charts have been around for quite awhile, but only gained traction
as a charting style in Western stock markets after being introduced by
Steve Nison through his book Beyond Candlesticks. As with the other
charting styles listed above, Renko charts are a trading system and
charting style all in one.
How Renko charts are constructed is
actually quite simple. From a StockCharts.com article:
Renko
charts have a pre-determined "Brick Size" that is used to determine
when new bricks are added to the chart. If prices move more than the
Brick Size above the top (or below thebottom) 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 and no more than one brick may occupy each
chart column.
By ignoring the passage of
time and volume data, Renko charts can effectively filter out noisy
markets giving you a cleaner look at support and resistance levels,
potential bottoming and topping patters and prevailing trends. By
nature, they are trending charts just the same way Point & Figure,
Three Line Break and Kagi charts are and thus, make excellent charts of
filtering market noise.
Filtering
Noise
Renko charts are completely trade worthy in
themselves, but I find many traders are uncomfortable (re:wussies)
trading without time and volume data. In that case, Renko charts can be
used as a way to filter minor market noise. Let's take a look at a
60-minute Renko chart of the Biotech ETF (IBB).
The first thing you'll notice
with this chart as well as the other two examples is just how clean the
charts are. Price is your primary focus and it's right up front. Renko
charts force you to keep your analysis simple.
You can clearly
see the trends, the support & resistance levels and key reversal
points. Once (IBB) was able to clear the descending overhead resistance
around 85.50, the trend took hold for a good 5 to 8 bucks before a
significant pullback into consolidation which is taking on the
appearance of a large descending triangle in a strong uptrend.
How
is this useful to your trading? By stripping out some of the sideways
chop, Renko charts simply focus you on levels that become obvious
psychological points of contention within the market. This gives you an
advantage for placing stop losses or spying breakout/down areas. With
Renko charts you're able to draw out cleaner, more visible support &
resistance levels that give you an edge over other traders who might
not see them through the clutter of bar or candlestick charts.
There's
no guess work involved when using Renko charts as you're not concerned
with the minor price fluctuations…just the results of price follow
through and resolution.
Would I use the Renko chart of (IBB) on
it's own? Not in this example, no. I'd trade off it if that's where the
trade began, but that's another blog post entirely.
I would,
however, use this as one type of view of (IBB) if I were already swing
trading it off time-based bar or candlestick charts. Because Renko
charts lack visible evidence of gaps, and some gaps are important bits
of information, in this form, a Renko chart is just one part of the
nightly analysis.
I didn't hit on every aspect of Renko charting
and didn't get into trading with Renko charts, so if you have an further
questions, hit me up in the comment section. Good luck and good
trading. Cheers.
Jack Damn
=^.^=
