Forex traders have a wide array of trading tools and software capabilities at their disposal. Some traders stick with a few commonly used technical indicators, while others use different charting methods, indicators, patterns and sources of information to analyze the market.
Renko charts are charting tools used by traders that are interested solely by the price movements, rather than the time intervals used by other charting methods, such as candlesticks. Renko charts are composed of “bricks” that are positioned 45 degrees above or below the prior price block. Forex trading Renko strategy was developed in Japan, but has since gained popularity among FX traders from around the world.
Core features of the Renko FX trading strategy
- Renko charts are made up of bricks that are placed 45 degrees from each other
- The brick can denote any price on the chart. This is called the box size and is derived from the Average True Range indicator
- Renko charts do not have set timeframes and each box may take different durations to form on the chart
- Renko charts are intended to filter out market noise and provide a somewhat watered-down look at price movements
- Each box uses the closing price, depending on the timeframe chosen by the trader
- Using Renko strategy trading FX is not highly popular, however, some traders find Renko super helpful
How does a Renko strategy in FX trading work?
Renko charts were developed in Japan and show up as price bricks, rather than the usual lines or candlesticks on the chart. Each box may have a fixed or variable timeframe and are 45 degrees apart from the neighboring boxes. The chart may look unusual when comparing it to regular charts, but Renko strategy Forex traders use is popular among trend traders, as it cuts out market noise and presents a streamlined look of trend formations on the market.
Renko chart definition and meaning
Renko charts were designed to focus on price movements, rather than timeframes, to present a clearer picture of trends forming on the market. Each brick is 45 degrees apart from the previous one, and box sizes for each brick may vary. For example, when selecting a box value of 50 pips, the next brick will not form unless a minimum 50-pip move happens on the market. Depending on the market conditions, this may take a few minutes, or hours. This is why it is crucial to choose relevant values for Renko boxes. If the value is too small, some market noise will be reintroduced. If the size is too large, the Renko chart will move very slowly.
While any indicator could be plotted on a Renko chart, some of them are more effective when used in conjunction with Renko than others:
- RSI – The Relative Strength Index, or RSI, measures the strength of market trends, which makes it especially effective with Renko, as the chart is also focused on trends.
- CCI – The Commodity Channel Index can be used as a momentum trigger for Renko strategies. When CCI is above +100, or below -100, this shows significant upward/downward momentum
- EMAs – The convergence and divergence of exponential moving averages can also be applied to Renko charts. When choosing two EMAs, if the shorter one rises above the longer one, this is a bullish signal, and vice versa
Fixed vs ATR box values
Traders have the option of customizing box values for Renko charts. They can select a specific value, or input ATR as the custom value. When deciding fixed values, the boxes will remain consistent in their size. While this adds flexibility for traders, choosing the appropriate box value can be tricky. When the boxes are too small, market noise will be persistent. When the boxes are too large, the chart will move very slowly.
Using ATR will result in changing brick sizes. The default ATR period is 14, but the ATR will fluctuate considerably and this will alter the formation speed and sizes of the Renko boxes.
The ATR values are also based on standard candlestick charts, which means that the ATR value shown on Renko charts can differ from the ATR value on standard charts, due to rounding differences.
Limitations of Renko charts
Renko charts come with their fair share of limitations. Renko charts don’t show nearly as much detail as bar charts and candlesticks. A currency pair that has been ranging back and forth for a while could be represented by a single Renko brick, which does not show an accurate picture. The highs and lows reached throughout a given period are also ignored, as Renko bricks only use closing prices. While this helps cut out market noise, the price could also break before the trader manages to mitigate losses and exit the trade. False signals can also be a theme when using Renko charts, as these charts were designed to follow the general price trend.
Due to these factors, traders are advised to use other technical indicators alongside Renko charts to avoid unforeseen losses.
Pros and cons of using Renko charts in forex
Renko charts, much like other charting methods, serve a specific purpose, which makes them convenient and useful for some traders and counterproductive for others. It is important for traders to understand these factors before applying Renko charts to their FX strategies.
- Renko charts can be highly accurate when it comes to displaying trends and their emergence on a chart
- Renko charts eliminate excess market noise
- Can be used with other technical indicators and Expert Advisors
- Relative low percentage of generated false signals
- No redrawing of data
- Renko does not take into account the time factor, as candlestick charts do. The drawing process of Renko boxes can vary and could take from a few minute to hours
- When Renko bricks are too small, the market noise advantage disappears. When the bricks are too large, movement speed will drop
- Bricks going in opposite directions are less frequent than the bricks moving in the same direction, which can be beneficial for trend traders, but can overcomplicate the use of technical indicators
- Renko is based on closing prices only, therefore, the number of bricks the price has moved by is only evident after the previous brick has closed
Example of the Renko strategy in forex trading
To get a better understanding on how the Renko charts work in practice, let’s look at the Renko Forex strategy example.
For this strategy, we will need the CCI, RSI and two EMAs.
- Plot 20 and 10-period exponential moving averages on the chart
- Plot the Relative Strength Index
- Plot the Commodity Channel Index
The key of this strategy is the usage of the aforementioned indicators. The EMAs measure the trend and the CCI acts as the trigger. The pattern is the most important part of the strategy.
To go long, keep a lookout for these signals:
- Price is in an uptrend with both the EMA showing bullish signals
- Price retraces, forming a double bottom pattern
- This double bottom pattern coincides with a regular divergence on the RSI
- The CCI histogram closes above +100
- Go long with the two positions set to 1:1 and 1:2 risk/reward ratios
FAQs on the Renko strategy in forex
Which timeframe is best for Renko forex strategy?
Any timeframe can be applied when using Renko charts. The Renko boxes usually do not have a strict timeframe and are tied to the Average True Range. Boxes may take as long as a few hours to generate, or could be done within minutes of the previous brick. Traders also have the option of using fixed timeframes for boxes, which makes box formations more predictable.
Is Renko forex trading strategy risky?
Renko charts are not Forex strategies themselves. Renko is a charting tool that places a greater emphasis on price movements and not the time periods. The risk can arise when traders are using Renko with ATR boxes, as they don’t form on set timeframes, and it can be challenging to anticipate the time required for each brick to form.
Is Renko Forex strategy good?
The Renko Forex strategies are favorable for traders who want an unobstructed view of trend formations on the chart and are interested in cutting out market noise and false signals from their trading strategies. Renko strategy for Forex traders can be beneficial, however, it depends on a trader. Some traders use Renko charts to their advantage, while others fail to make an affective use of it. The best way to know if it’s for you is to demo trade using Renko strategies.