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. Let’s compare price action between a renko chart and a candlestick chart on similar settings. Looking at the renko chart, there were several trading opportunities that would not have been seen when using the candlestick chart alone.
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 prices are at supply and hitting or exceeding the upper band, then price is overbought and is likely to fall. When price is at demand and also touching or exceeding the bottom band, then an oversold situation is occurring and price should rally.
Recently I wrote about the use of the RSI as an odds enhancer in your trading. In the following chart, I combined the RSI with the renko chart in order to increase its effectiveness. In the following chart of Las Vegas Sands, (LVS), price is hitting a supply zone several times and a trader should be looking to short the stock. When price first hits supply, the RSI is below 60 and confirms that supply should hold and new lows are likely to be made in price.
Notice what happened when price hit the supply level on the ninth. RSI was originally above 60 but provided a negative divergence. This confirmed that the supply level would likely hold but price was not ready to drop to new lows immediately. When the retracement happened and price failed to reach new highs, the RSI being below 60 signaled that price was now ready to drop to the new lows near the target demand.
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 red 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!