Last week we discussed the use of renko charts as a way to reduce market noise and maximize trading profits. This week, we will dig deeper into the use of renko in our trading. Looking at a Renko chart versus a typical candlestick chart, you can see how not viewing small pullbacks could keep you in your trades longer.
We have seen how supply and demand zones can be easily seen using the Renko charts. By adding indicators to the price chart, we may also be able to identify the trend and potential reversal areas. One such price tool is a moving average. The moving average smooths out prices to form a trend following indicator. Since it is an average, we should expect price to return to the average when it has extended too far from it. The bounce may offer a trader the opportunity to re-enter the trend with lower risk.
Bollinger Bands® can also be placed on renko charts and used in a similar manner to the methods we teach in our Professional Trader class for candlestick charts.
When trading with any charts, we should have trading rules that establish proper use of our tools. This way we can reduce the effect of emotions on our trading and increase the probability of success. When trading with renko, there are some basic rules to remember:
- Trade only in the direction of the dominant trend and enter at supply or demand levels.
- Buy at demand and target supply for your exit. Sell short at supply and target demand for an exit.
- Stay in the trade until you see a brick of a different color. When long, you would exit at the first black brick. If you are short, a green brick would signal a stop.
You can create other, more detailed rules as well based on your experience and style. Just make sure to protect your trading capital whenever involved in a trade. Until next time, may all your trades be green!