Most traders have some very obvious questions: What is the significance of a time-frame? Why a candle must start and end at a specific time? Why a bar should be constructed by 5 minutes period and not by a 4 or 6 minutes period? Is the bullish candlestick that we see really bullish or if we shift the time 1-2 minutes it will become bearish? What if we have build strategies based on such aspects?
All these are really interesting questions. The obvious parameter that we should consider is time. Time in trading has almost no meaning unless it’s a self-fulfilling prophecy because all the traders are looking at the same chart. OK let’s be more realistic, time has some significance because people are most prone to do things at integral times. Probably not many of us book a date at 10:52, we would prefer 11:00 or 10:30 or 10:45. Human mind can think easily with integral numbers rather than fractions. Also, most of the market news are released at integral times and most of the time specific automated systems are programmed to open or close positions at integral times.
Some Japanese guys had an idea of ignoring the time in a chart by replacing it with specific market movements. The Renko chart was born from the Japanese word “renga” that means “brick” and so it is as you can see at the following image:
Easily we can observe that all the candles are the same, there are no big or small candles, there are candles with big bodies or big wicks. It really looks like a series of bricks so the name is really successful.
Renko bars are created from price movements and not from time pass. We just need to set the number of pips or points that need to define a Renko bar and this bar will not be fulfilled until the number of pips or points occurs. It means that if the price now is 100 and we set the number of points for a Renko bar at the value of 10, only when price goes to 110 or 90 the bar will close (if it goes to 110 it w
ill be a bullish bar and if it goes to 90 it will be a bearish bar).
This approach has many serious pros:
- We avoid in a degree the sideways movements. For example, many FX currency pairs have no serious activity during the night. With a time chart, many bars will appear at this period but with Renko charts a very small number of bars will appear. Most of the strategies give false signals when there’s a sequence of small time bars that push the indicators or a price action strategy to give signals.
- In very fast price movements a critical number of Renko bars will appear almost immediately allowing our strategy to be executed fast. How many times many strategies delay to open a position because the current time bar must close before the signal is given? When there’s a fast movement, many Renko bars will appear very fast, allowing are strategy to act accordingly fast.
- The noise if filtered for specific price action strategies. For example, the trend indication with higher highs/higher lows or lower highs/lower lows sometimes is clearer if we remove the noise through the Renko bars.
Renko charts has some cons as well:
- Some strategies based on candlesticks cannot work with Renko charts. For example, Japanese candlestick patterns that are based on candle’s open/close/high/low and bodies/wicks are obviously not applicable since all Renko bars have the same size
- Some indicators based on candlestick behaviours are also not applicable
- We always have to resolve the issue of selecting the correct number of pips or points in order to create a brick – Renko bar.
In any case, the conclusion is that a trader should at least try the Renko charts because it may be proved a serious help for specific trading styles.