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I CHART 'PATTERNS i

Brick By Brick, Building A Chart

Trading Renko Charts

bJt Sun Duddella

er.ko cherts were invented ny Japanese traders hundreds of years ago und named for ,-encll, <I Ji1p<1I)"'.$ewordfcr"bric:k,,"Ho1.I'::tretDcydiffl::I"CtlE from bar cr-caudlestick charts? Fjrsr of all they are ... isually anractive, mllkin:;;: it "'.Q5y to Iilter no.isellnd isolate treads. nee}' shnw symmetry and are effective in determining the: major trend andsuppon & resistance areas. Renko chllIt:iarealso-efficientinsigruilinglrrnd-«"m!il.pal1.:rDs.

WlIAT ARE THEY?

Renko charts are another way of representing price changes. They display treads ill eucha way that may not be obvious in a bar or candlestick chan, Renko charts are able to suppress the noise dL~play and produce uniformity in [he o.nderlying trend. Although useful, renko cherts also produce whipsaws end have sertousreedmg cavcars, bm overall mere are advanmges to renkn-based trading. Dne is that ti trader iends ro 5WI}' in a trade longer than other freod-following techniques

TH:E A1)VAl''TAGI.1..s

Compared to) more conventional charts llke bar cherts and candtesnck chan", .renjco charts make the decision-making

ill Figure S you $M a s.pr~~ds.b!!<01 comparing

one-minute. five-minute. and 30-minuu: runge

I renxo uud bar cbans on various trading days. FtGURE_1B:REllILO VS.I!IAH."A11holJgh~afE r...~-rniMetiJar.s.of1he ERz..lh .. ro;,nkOISfarWolPI~

and ISVI~~~ pl~asJ"9. E!rJIC~3 ~ provlde mora prDH~Bbl~ lr:Jdl~g resu~~? CONSTRUCTIN'C 1;i:1;~NKO ooXES

Renko charts are composed of red or green "bricks" ot green) and continues for tWO or ruore bricks in the same "boxes" that move in the direction of the trend. U:.ually. a di.recrian.. lfyou Iookmcoovcnnonalchartssuch asbarchans I

trend ~tat1: di~plt1}~ng a re\~f.r,s.::ll b(}: (green I; red or ~u to or ~l:!arLS during :.imilm lillie p~~

• 1~1 !.Ul21106 .YI!I~ ~~<'21~ r>miLf1(hi I Superior

~ tU (1&" 'IDS :Il;§_ lOS ~f1:5 ~ Perfannance

process easier. ,fJ, typical one-minute 11M chan of the emini Russell ~OOO (ER21 wonld have about ~D5 bars ill H ria}', whereas a simllar reuko chan (of cne-pobu bcs siz~) would produce 25 10 50 renko boxes. The fewer boxes reduce the number of variables you need ro consider for your trading decisions Juring rherrading day. Jf yOH look at II. FivemU1LlIe cn;:u-r., a bar chan would display 81 bars. waereasrenkccbenswcctddisetay 17to 3S boxes 01.1. a typical day. So Ii longer lime

I f.I'lIUlCC:h.:art WNdd. produce fcw~.r renko boxes. In Figure 1 vou see accmpansonora renko

and bar chart display OJ) five-minute charts of the ER2. Figure lA. disptnys a rcnko box Iormarion LInd ,Flg'ure IB 6how~ a conveuL'LOmU five-minute b-ar CI~i1If. On Januarv 30, "2007_ (here wen: Dine one-point renkc boxes

I on Iheii. ve-minul_c.chart. whereas Oil the fiveminute bar dum: there WI;n! 81 bars. You can see a similar situation on Junuary 31 .

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Fl!IURE1A: RUKD DDXE5

@ER2_D-5 min. 1.pt. box size

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7&"1.00

1B4.00

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804_DO

&12,00

196.00

794.(10

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fl!lUKE 2: CI~~-MINUTE, FIVE-MlltUn:, AN03D·MINUfERA1IGe, IUJlKO, liND BAR CHAins. Hsrs )"Ousce h~' nany b~r~~j'&cl9~(fodlcrlhree-diHeJBnl oilar1in'}~~laG,l'Il1hth~exc:eption.:ottt,eJO-,:ninutel;.m.lherenkohacfthslM.st nUlT;OEr 01 bars rof ihe :!IIIl~~ftjmeoefiod

For more jniorm",~o!"l circle No, 36

Menl<o hpt. box c:onstruciion

find them generaring various signals. and trends (or countertrends). But e reukc chart will-remain ill the same trend mu.ot (ilirt-cl.iofl) until another reversal 00;0: appears.

Once a renko brick i:. funned. it is nOT going to cbange ira uireerion until the next one forms. For example, if you are looking at a daily renkc chart of tile Standard & POOr"5 :100 futures with a brick size of five pO~III~. und if QIl tile- foUO\"'ing day the S&Pcloses 16 points up, you will See three brlcks dis-played U:J tile up (green) direction. Similarly in a downtrend, if the S&P .500 closes down nine points all the following day ,3, five-point. brick size renko will di!ip!ay only one. brick to [he downside. Renko boxes arc never drawil next to €aCh other. They are always drawn ut4S-de_gree or-4~-degree: angles IU Hie prlorbcx. The size of the box willnever change, nor will il be removedoncc itis crested.

til Figure 3, a reaxo CQ:lJ1 of a one-point box size i:;. being constructed from the data. The renko boxes. are constructed from closing price-so Here you see the closing prices for each bcr and the change ill closing prices along with the respective one-point renko coxes,

RE"!\lW BOX S1.l.E

The size of the box eetermlnes the gcncratiun of the oend and its direction. Smaller box sizes would mean more boxes and more whipsaw action . .Bigger I).""lX sizes would mean more larenr price action and more delayed entries.

Setting up tbc box size in renko chartsis more oran art than n science. Various studies have been done LO determine optimal box 5i7.:c.~, bill UIOSI are speritic to indix .. idual lnsrrumeuts and their volatility range.

."'.'1 a rule, a minimurn size.of I % is applied to daily chans.

On lnrradav charts SOUle trader; pr.>fer to usc a fixed-dollar amount based OD the daily cios.il!g price for the box size. A few studies hevc been done to see if average true runge (A TR) may help in determining box size, wbueomcr smdieasuegest using a fraction citlu- opening range for imraday trading. The box .s,il.e also could vary depending on the time Inune

You need to experiment wlrh various box sizes and find one that fits your trading time frame and indicators. For example, if you arc lrnding a stock valued between S10 and $20arJd using a five-nnnnte cherr, you may cpttc use a box S~7..e of $0. I 0, For btgher-ortces ,i-LOcks you may wan! ru use e box size between $O.25I1nd SO_50

From experience. l bave found that intraday rcnkc cuans are more cfficicm thau tbe end-of-dey version. This.is because it could take du\'s or even weeks for the next box 10 develop in an end-or-day renko chart,

CAVEA.TS IN" ,RE.."i'KO Clh\RTS

Although renko chans ere vislt<1l1y "Ppell~illg ami show trends well, they don't come wuhont rheir share of problems:

t. REnko boxes suppress noise and/or volatility. Since i1 could rake five minutes or 50 minutes for each 00;>;' to

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J b.I .. 5)0 -o.m A

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form, this may be an issue .. Since the:" new boxes are generated only 011 the dO~E cf the interval bar on ce current chart, wailing for the nextbux to becomplered could J:I1.<!lu': vcu anxious. During congestion periods. jl could take eveu longer for the boxes tu COnn. While one rcnko box. is being formed, the bar or candlestick chan: could show congestion and lead te undesired whipsaws Dr choppy trade seuips. Keep ill mind thnt uiuny reoko bnxrcversatstake place close to kcymcviugaverages or other critical price levejs. If irdccsleudte akey support &: resistance area, Ibis could prove to be signitica.Ol:.

2 .. Smalle-r box sizes will result in more whipsaws, but bigger OOX size. s, would mean delayed trade enrncs.

3. In fLII uptrend. the difference between the top of an upsid-e green renko and [he bottom crurc new renkc reversal is three timex the box size. This is because for n reversal renko box to form. y011 need II cJ()!'O! below the borrom of the renko box. Thus. you bave to wait loneer for a reversal box. As a resulr, you need other ~ay:; to prot.eC[ profits. There could also be iss Lies with commisxions and xlippage.

4. The. reversal boxes fire fur less (ill number) than (Ol1.lil.HlOU~ boxes. This is actually <In advumage during trendx, but as with many trendlndlcators. it cculd teed to whipsaws.

5. Renko boxes arc bus .. -J 11[1 dosing prices only and the number of boxes for u reversal Or trend wi II only be known when rhecurrcnt bar- is closed. Thi.scould tead to delayed entries and slippage. Auomer critical issue is the number of renko boxes generated f-etore [he curreur bar or session is closed.

._ TR,.\UlNG RTh'KO CHARTS:

.~ n.:W RULf._t;)

1. Lflhe color of the brick changes from red to green, it ts !I sigual to buyer cover. Conversely.you can sell sbon or close II long position when rhecolor changes Irom green cored

2. Look fnr rrends, orimpujse moves.nndtrcde nnlyinthe -direc[!On of 111£ major treurl

3. Catching rhe middle of the move doesn't result in profitable trading in the rcnko system,

4. Following Iixed-targer prices protects your profits.

CH_.\RT PATTERNS

ER25-r;nin. 1~pt. ba~slze

5. Renko cherts define surpon & resistance areas anti trading tho initial breakouts lend LO be more profuablr,

(). Some stop and reverse strategies CSA~) have been knowutohe profitable in r';:LU:O trading.

7. Renko chart trading works well when applied to pairs LTw..Iing - thar is, buying LJ high relative strength stock crhilc shorting a low relative strength suxk in the same

industrial group.

8. Renko charts could te.usedwlthorherkey !ec:hnjca~ lndlcatcrs. These tnelnde patTern recognltlou techniques 5UCih as Asc Gartleyrbutterfly, or zigzag tools. You could else I1pply tecbcical/momermunlcdlcators such as moving averages. BoHjllgtr Bands. and moving a ... ·cru_!!1: "onvergence/divergence {MACD)

_4NATOMY OF RENKO ClL\R'JS

Since renkc charts lIID a study uf price rnovemcn ts, umc.is not La.u'_ninltlcuClsi.defLJtloo wbcn plotting the chart. Renko boxes me generated when a pricecloscs uboveshclow apreser box size. Since ren ko boxes arc omsnucted independen r of time, gaps are removed and the renko charta are.a145 and -45 degrees from the previous boxes.

TRAOTNGftf.!\rl{O wrra OTmm f'AT'f'FP:I'lS

Figure a shows five-mimnerenkc ebarts of onepcinc box size. Tiley can be used 10 find chat pauems like symmetrical triangles and Gartley patterns. You can also see Bollinger Band .reversals 011 The chart rl5 well <IS key moving ~verage support and resistance areas

Figure 5 compare". indicators betweena liveminute renko chart anti a fi ve-minure bar chart (Sill), A5S-period exponential moving average lB,[A).anel::l Hollinger Hand (2l-pcr1{JJ< LWO-staoderd de"i1t'ion),.an~ applied to both charts The bar chart shows H. dense chan Icrmation,

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i. Symmetrical triangle

2. Garney formuucn (not clearly

visible ill bar chan)

3, Resistance at tbc upcn (not seen easily mbar chastj

4. Gap formation

,5, MOiling 311aagc and Bollinger Band reversal

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304.00 B(]~_OO

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FlG.lfRE 4: TRADIIiIl 'REiNK(] Wi"tH aTHER Pl:m:::RNS. I,l~ra r» ,;~~ tnB fQ.m~tlon '" '" I ~1mrr,lOlIio~11mmgle •. DullloJiJ Gaf(l~v ~a;1~m. Boillngsr sane flI~~rm, ke~ mo~ing !!I,;I$1l3.!f-! suppcll, ~n~re3IMarn:€ levee.

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FIIiIJA.E 5: IIIUIGUDRS III ReNKO Yli. BAl'I CHART. A 55·perlotl ~~pcnenjial m~'il s.vs;ags I (EMAl and a 21·period, ""'1)-St.!Gr;jd0vi~'io~ Bolli1-',gEr Bi!j)j~ie appli~d I(] bo~n<i'rar9~_ rne renl«l 11l<lrl shews rnechcleerej peters.

lfl4 1125

I FIGUR~ 6.: TRADlI,£BWl,,:" BDUIrIG~R BAJrlOS, HereyGu se ... tlr,.1 B~lling~rEl~nds[;aJIbe ~5edwell ~,1lh{enKochllrtsl!liden~!O'·,·~!.ill1'.

ER25-min. 1.p~. bax size

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I FIGURE 7: RfNKO CHARTS WITH MOVING AV.ERAG'ES. Here's hOWJ; ;2·"pl.loodmo'fit:9average ~I.'1S as "" ~I,'oog suppcr1i~opJ!.

@ZGdaily, box size 7-p1. (March 2006-Jan. 2007)

lf06 6100 ~'OB 10,'00 12lOti

I fIGURE.S: REIIKO AI([) SUPpORT{REUSTUGE. On 1his dBUrf;l1~ orthe~:ominuou~ MurllS D:'ntrat.:tyoucan~~rlyseelheSll?iX'na-re~l!!'iEs.

1B5.00

800.oJ

195_00 6. Clear resistance at me market hlgbs

moc vislbte In bur cnart).

700.00

TRADll-.;'C; RENKO WITH BOLLLNCER BANOS

Renko chan-based BollliJger Bands tend to signa] ueace well. There are many trade setups.pessible using. Bollinger B<lfld_,,_ These include trend changes 11.1 key SLlPpOTl &. resistance levelsand consuicnonot'bands CO signal volurituy changes. But ODe or !he studies I found interesting _0 trs .. de is the ~LTon!J. reversal box formation outside the. bands.

Figure 6 displays a Iive-minute renko chart of EJU with a one-point box size. Bollloeer Bands l21-period. two standard devieucnsjare overlaid 011 the chart. Youcansee tho: renkc box reversals took place closerc the Bollinger Bands. POLuIS A, 6, C, and D show upside reversers. while E.:md Fare downside reversals. At G. ER2 shows rome consondetlon at the middle Bellinger Band III such a scenario YOll should initiate a trade in the direction of the primary trend, which In this case is up.

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MOVL~G AVERAGES

Pigurc 'r illustrates how moving averages play a critical role in trading with reeko charts. On the five-rmnure chart ortbe ER2 wlrh the 00" sill: set tc one point, a 21~perJod moving average (on renko managed dum) is plotted to spot key resisrnnce &, support areas. A1 point A (January 26,2007). ER2 breaks above the 21- period moving a v erage to signn1 change of uend direction r(l the upside. After successive aucruprs to trade at points Band C ER2 continuc 10 demonstrate the upside treed. The lowcrpanotthcgraph shows the ;\-f.';'CD. which is plcncd to find key divergences jn Lht rrend.

750-00 7400_00 72O_O(J 700.00 6&0.00

PU'rilNG IT ALL TOGETI-U~R

Figurt>.9 shows a one-minute rcnl;ochartofBR2 with a box size of <me pOiDL n shows polelliial I trade SNUIK Trade~ an: only taken in [he direc-

eoco ""., 600.00 5BO_OO 500.00

RE1"oo-KO ANIJ RES [STANCE & SUPPORT Figure 8 shows tJH! renko daily chart or gold continuous futures coutrurt. The box size is set 10 se ... eupolms. From MiU'Cl\ fO October 2Q{}6 geld traded from 580 HJ 760, sentng up various SllP~O!1 & resisrance areas. In January 2007. gold bounced (off:J key support area of 620 10 thl: next reststance.Jevet of658. Trading above that level wnuld sigual atrendroward 680-690, which are the nC.~1 resistance levels,

I CHART PA ITERNS

810.00

Renko charts show symmetry and are effective at determining the major trend and support & resistance

rirm [Jof the trend. Points Aj B, and C are ~1l011S with a cue-point stop and two-point targets. Trades D.E. G, and 1 f1I(: taken in an uprreud wltb one-point stop and two-point LaIgcts.

• Trades A IUlLl B are shorts inhimed below the downside reversal box.

• Trade C is below previous support

• Trade D is n long trade initiated above a key breakoutlevel.

• Trade Eis initialed afrcrthebroakout in the direction of rhe trend.

• Trade G is long (closed for a loss)

• Trade H is all ereacfconsctiuanon bctorefbe breakout cl prior trend

• Trade l lstaken in the direction nf rrend.

CO~C['USION

Renko charts art! visually pleasing. They snow syromerry and are effective :fI~ determining tbe mejcruend und support & resistance urcns. Renko charts suppress the noise display and T-""--","""':~::"::J produce uniformir.y in the

underlying trend. and renkocharts arc also efficient er signaling trend-reversal panems. They are bused on closing prices

Now featuring Tools fo!. ..

Tradestatlorr

Alrofar: JIn;~.W',,*,l.iP. <r!l;J1,Io!fiTr&~.WJ_\~d •. !~I!I:~~.rrr.",I"lF:l ae~ te>ro:e._ T"'*<m:~."""~.m"' .. ~""--v.!l"r .. :Io3:d""Nr;jol=a;;SI...,.tI""roOMIr ....... ,~oIOmi(:;"~Gell!j;jT;.aIl:.,,;!lb:...mr"'~

For mom ,1l1~(.ma"on Oirtte No.1!:'

ER2. one-min. 1.pt. box size

7>0.00

7~.CO

1126.'(17

FIGURE 9: PUfTiNG IT ALL TOI>EntEfi. 'trades C81l('D Initialed us,flg r.,nl<o cherts. Nolehow re~er5<l1 boxes. &u~j)on1resl~t~r'lce levels. creerouts. and coascl cascns all come rntc use.

and the concept i.:. similar to that of point & figure charting,

Renko charts buy and sell signals are generated WIlen the renko boxes-change the colors (green 10 red or red to green]. They can also be used with other indicators IO help improve your rradmg results.

Despite rheil: cevems, renko charts identify various reversal patterns and show excellent support & resistance i'lretlb.

Suri Dllddf3.1111 is (I private tmderwlw has been trading in lhe fumrl!_~ . .equities, <lIId [orex llwrkets [ull rime for the pllSl 12 years Pis/JIg his proprielarymadels and me/hods. FQrmoreon l!isr:es:earch, I!lsi( fliswe.b s ilt: at www.sutinotes.caei.He mav M reached or SwiNule~'@lJmai!,com, <

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