In the fast-paced world of day trading, traders are always on the lookout for innovative tools and techniques that can provide them with a competitive edge. One such technique that has gained popularity in recent years is undoubtedly Renko charting. Renko charts offer a unique perspective on price movements, but the question remains: Is Renko truly good for day trading? In this article, we will delve into the concept of Renko charts, explore their undeniable benefits, and assess whether they are a suitable tool for day trading strategies. Let’s learn more about why to use Renko charts.
Understanding Renko Charts
Renko charts are a specialized form of technical analysis that focuses solely on price movements, filtering out time and volume considerations. Unlike traditional candlestick charts or bar charts, which represent price changes over a fixed time period, Renko charts are built based on price movement thresholds. The term “Renko” is derived from the Japanese word “renga,” meaning bricks. Just as bricks are used to build structures, Renko charts are constructed using “bricks” that represent a fixed price shift, as opposed to candlestick charts. To put it in a nut shell, a traditional candlestick chart shows price changes over a fixed period of time, whereras Renko chart shows a fixed price shift.
Each brick on a Renko chart has a predetermined price range, and a new brick is added only when the price movement exceeds this selected range. If the price doesn’t move enough to form a new brick (minor price movements), the chart remains unchanged. This unique approach eliminates the noise caused by minor price fluctuations and provides traders with a clearer view of the overall trend. Renko bricks compose Renko charts. Renko charts have a unique advantage of being independent of time. This means that only when the price moves by a certain number of pips, new Renko bricks are drawn. Using Renko charts roots out the time factor.
As Renko bricks are building up over time, they also create chart patterns similar to standard candlestick charts. When Renko chart patterns are visible on the chart, they are easy to identify, decipher and are more reliable.
However, the most common charts are the candlestick ones. Why? Because they indicate the opening, body, and the closing price.
The step of paramount importance in creating Renko charts is setting the size of the brick. A brick forms on your Renko chart once the price has moved by the predefined amount, and never before.
Benefits of Renko Charts for day trading
- Simplified Price Trends: Renko charts excel at highlighting the underlying price trends by removing the distractions of time-based intervals. This simplicity can aid day traders in identifying the dominant trend, making it easier to make informed trading decisions.
- Reduced Noise and False Signals: Day traders often struggle with distinguishing between genuine price changes and short-lived fluctuations. Renko chart filters out the noise, ensuring that traders are more likely to spot real trends rather than getting misled by temporary price spikes.
- Enhanced Support and Resistance Levels: Renko chart provides a clearer representation of support and resistance levels. Since these levels are based on significant price fluctuations rather than arbitrary time frames, they tend to be more accurate and actionable.
- Minimized Emotional Responses: The elimination of time-based data reduces the influence of emotional responses caused by rapid market fluctuations. This can help traders maintain a more disciplined and objective approach to trading.
- Adaptable to Various Strategies: Renko chart can be used alongside various trading strategies, including trend-following, breakout, and reversal strategies. Their ability to filter out noise makes them particularly effective for traders who prefer a more systematic approach.
Why Renko might not be ideal for day trading – minor obstacles you should be aware of
- Limited information: Renko charts simplify price changes to bricks, potentially leaving out important details about price behavior, such as opening and closing prices within each brick. This lack of information might not suit all day trading strategies, especially those relying heavily on precise entry and exit points.
- Delayed signal recognition: Renko charts, due to their nature, might lag behind the latest price movements, causing traders to miss out on certain opportunities. This delay can be a drawback for day traders who rely on real-time data for quick decisions.
- Incompatibility with traditional volume analysis: Volume is a crucial factor in analyzing price movements observed on fast time frame charts, and Renko charts don’t take volume into consideration. For traders who rely on volume-based indicators, Renko might not provide a complete picture.
Renko charts – pros and cons
In the world of day trading, Renko charts present a compelling alternative to traditional time-based charting methods. Their ability to filter out noise, simplify trends, and offer clearer support and resistance levels can greatly benefit day traders seeking a more objective view of the markets.
However, it’s important to recognize that Renko charts come with their own set of limitations. The reduced amount of information can impact the effectiveness of certain day trading strategies.
Ultimately, the suitability of Renko charts for day trading depends on individual trading preferences and goals. Traders who value simplicity, trend clarity, and reduced emotional influence may find Renko charts to be a valuable addition to their toolkit.
On the other hand, traders who rely on intricate price data, real-time analysis, and volume-based indicators might prefer sticking to traditional charting methods. As with any trading tool, thorough testing and customization to fit one’s strategy are essential to determine whether Renko charts align with the trader’s objectives.