The Renko Chart Indicator
The Renko chart indicator is a very versatile tool in MetaTrader 4 and can be applied to so many different strategies depending on what each trader wants. A very basic of the Renko chart indicator is to show the trader very easily if the market has moved significantly and how significantly it has moved, depending on the trader's settings of the Renko chart indicator. This is particularly good for beginner traders.
What is a Renko Chart Indicator?
A basic price chart plots price according to the amount of time that has elapsed. In contrast, a Renko chart is simply concerned with the movement of price, and not time. Hence, it only displays price fluctuations that meet a minimum amount usually set by the trader using the Renko Chart indicator. Any changes in Price that do not reach this minimum amount are usually filtered out by the Renko chart indicator. This helps the trader to keep his attention on larger, significant moves, and also helps the trader not to avoid the minute fluctuations in the market.
A Renko Chart Indicator is very different from a regular MT4 Chart since it only shows you how much price has moved as against the standard MT4 chart that always gives you a new bar as time passes. With the Renko chart indicator, the trader only sees a new bar forming if the price fluctuations meet or surpass the trader's set bar limit. For instance, a trader may decide that 10 pips are a significant move for the EURUSD currency pair and that any moves less than this should be ignored.
Renko chart Indicator plots blocks (also called bricks) of a certain fixed value usually determined by the trader, in terms of price movement. Using a Renko chart indicator with a block size of 10 pips, for instance, would allow the trader to see moves equivalent to only 10 pips or more, thereby helping the trader to more easily recognize and understand market trends. More importantly, the Renko Chart Indicator helps the trader to identify possible support and resistance levels in the markets.
How the Renko Chart Indicator Works
As an example, assume that the current price of bitcoin is at $7,900 and a trader has set the Renko chart indicator to have created bricks of $10 each. Once the current bitcoin price reaches $7,910, the Renko chart indicator will create a new Renko brick corresponding to the price increment. Assuming the price of bitcoin only reaches $7,909, the Renko chart indicator will not create any new blocks since the price move is not significant enough. Importantly, the Renko chart indicator does not repaint and every new brick remains once created.
The Renko chart indicator does not create bricks side by side. Hence, once the price of bitcoin falls to $7,900 after a new brick has already been formed by price rising to $7,910 and passing it, new brick to the downside will not be created directly beside the previous bullish brick. The price of bitcoin has to fall to $7,899 before a new down brick will then be created by the Renko chart indicator on the lower right side of the previous up brick created.
The Renko chart indicator produces bricks that have a time axis, although the time scale is not fixed. Some bricks may take longer to form than others, depending on how long it takes for the price to move through the required brick size. The bricks formed by the Renko Chart Indicator help to filter out the noise and help traders to see trends clearly, since all price fluctuations that do not correspond to the set brick amount are not indicated by the Renko Chart indicator.
The Renko chart indicator also only uses closing prices based on the chosen chart time frame to form bricks. For instance, if a trader uses a Daily time frame, then only Daily closing prices will be used to construct the bricks.
Advantages and Disadvantages of Using the Renko Chart Indicator
Using the Renko Chart Indicator helps to eliminate market noise. Since each brick represents a pre-determined size of price movement, It ends up giving the trader a very clean chart.
The Renko Chart Indicator is very good at highlighting trends and support/resistance levels in the market. This is because a clean chart environment is created by the Renko chart indicator. Also, technical analysis using a Renko chart indicator is a lot simpler and is especially more efficient for beginner traders. Also, retracements and trend continuation patterns are easier spotted and make it easier for traders to identify and focus on the larger, more important trends.
The bricks created by the Renko chart indicator do not give the trader the same information that a candlestick can (i.e. open, high, low, close). So although price patterns do exist in the Renko charts, individual bricks do not give much information on market participant behavior.
Trading with the Renko chart indicator can be a great way for Traders who want to improve some aspects of their trading such as patience or being impulsive while trading due to the way that the Renko chart indicator plots bricks. And more significantly, using the Renko chart indicator also helps in keeping the winners running and cutting the losing trades quickly.
Possible Trading Ideas using the Renko Chart Indicator
At the most basic level, the Renko chart indicator makes it easier for the trader to view the current state of the market. For instance, a sequence of consecutive down-blocks clearly shows that the market is in a downtrend. A very simple but aggressive trading strategy that attempts to capture the trend is for the trader to take each new block as a directional signal – a new up-block representing a buy signal, and a new down-block representing a sell signal.
It's also possible to come up with more sophisticated strategies combining the Renko chart indicator with other indicators. For instance, a trader could use the Renko chart indicator with the 15 Exponential moving average indicators. In this instance, When the Renko blocks break under the exponential moving average, it is a sell signal. When they break above the exponential moving average, it is a buy signal.