Brick By Brick
A common complaint I hear from traders is that they are allowing their losers to run while cutting their winners short. Obviously this process will produce bigger losers than winners and cause you to lose overall in your account. To be successful in any type of trading, we want small losers and larger winners, but how can we overcome the fear that makes us take profits early in a winning position? Market "noise," or minor fluctuations, trigger the fearful response in traders that causes them to exit otherwise profitable positions. One way is to use a system of charting that filters out most "market noise."
Enter Renko charts. Renko, originating from the Japanese word Renga meaning brick, offers a simpler view of the trend and allows traders a clearer view of the price action as well as support and resistance. The nice thing about Renko is that it can be used for charting any market, equities, futures, forex, or commodities. It ignores time and only focuses on the price action and trends.
As you can see from the picture above, Renko charts are constructed by use of red and green "bricks" or "boxes". The first step to constructing a Renko chart is to select the size for each box. For instance, if you are trading Apple stock, you could make the brick settings $2.00 for each brick. If the price moves up by $2.00, you would see a new green brick formed to the right and higher than the previous one. As price continues to move up, another green brick will be formed only if price advances by a full $2.00. If price reverses by the size of two bricks, in this case $4.00, then a red brick will signal a reversal and time to exit the trend.
An easy system to follow is to trade in the direction of the trend, and exit when it reverses. Support and resistance levels are easily seen on Renko charts. The thing you have to remember though is that the reversal signal will be when price moves twice the size of the bricks in the opposite direction. If you do not want to wait for a $4.00 reversal in Apple, you could make the bricks smaller. Experiment with your security to see the best settings for your risk management rules. A trend is defined by a minimum of three green bricks in a row for an uptrend and three red bricks in a row for the downtrend. You can enter the trade on the third brick. A reversal is noted by one brick of opposite color and signals your exit from the trade. Pretty easy isn’t it?
You can also see reversal patterns clearer on Renko charts. Below are examples of Renko charts on the EUR/USD currency pair.
You can see both Head and Shoulders and Inverse Head and Shoulders patterns with the measured moves. Renko can help you stay in the trend and exit when there is trouble. If you want more information on these types of charts, feel free to contact me or stop by your local Online Trading Academy center to sign up for one of our excellent classes.
Until next time, may your trades be green and your losses small! |
A member of the Market Technicians Association, the Chartered Financial Analyst Institute, and now holding the Chartered Market Technician Designation, Brandon has appeared as a guest on CNBC Asia's Cash Flow and conducted special seminars for CNBC staff on technical analysis. He has published articles in The Trader's Journal Magazine and was interviewed in Share Investor Magazine. Brandon was also an industry expert speaker at the Asia Traders and Investors Conference 2008. As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his trading classes and lectures. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An Online Trading Academy graduate himself in 1998, Brandon has been trading equities, options, forex, and futures in his own account since.