Categories
Forex Technical Analysis

Why Is Everyone Talking About Renko Charts?

Is the Renko chart a revolution in forex trading? A game-changer? Or is it a dead-end that’s going to cost you time and money? Read this to find out!

A Jenga Tower Made of Renga

Renko charts, conceived and designed in Japan, are a potentially revolutionary trading tool and everyone’s talking about them. The basic concept is relatively simple but the ripple effects are not and they could have a huge impact on how you trade. So what is a Renko chart anyway?

In the simplest possible terms, a Renko chart is composed of bricks (rather than candles) that are called renga – after the Japanese word for “brick”. Each brick represents a given price movement – in forex trading, this is expressed by a pip value that you determine when creating the chart. The bricks form when the price moves enough in one direction to cover the pip value. That sounds simple enough, doesn’t it?  

The first knock-on effect of forming a chart this way is that it knocks out the timeframe. That’s not to say there isn’t a time component to a Renko chart – the time axis is still along X but the way bricks form is not the same way candles form in a traditional chart. We’re used to a candle forming once a set amount of time has passed, regardless of how much the price has moved during that time but on a Renko chart, this approach is turned on its head. The renga bricks form only when the price has moved sufficiently in one direction – which, if the price is moving sideways enough to stay within the pip value you selected for the chart, could take quite some time. Purely theoretically, the brick could take indefinitely long to form if the price stays level (of course, that’s never going to actually happen but isn’t there something a bit unsettling about the idea that it could?). Conversely, when the price moves sharply, a long line of renga bricks might form in a very short time. But, because there is no timeframe, looking back at a run of bricks, you won’t have any indication of how quickly events unfolded.

So if a Renko chart is such an inversion of the usual rules for the way your chart forms over time, how will it affect your trading? Well, that’s what we’re here to find out.

How to Navigate a Renko Chart

Charts, just like the maps used by seafarers of ye olde times, are your guide to sailing the waves of the market, and, just like the maps of yore, they will adapt and new innovations will appear over time. Renko is just such an innovation and knowing what it can do for your ability to navigate through choppy seas is vital. In fact, it is important to know what it is, what it does, and how it works, even if you don’t end up using it. This is down to the simple fact that, if you want to improve and grow as a trader, you need to understand the tools that are out there and how they can potentially improve your trading.

First of all, the rules underpinning a Renko chart are so different it almost calls out for you to forget everything you’ve ever learned about reading a chart. But at the same time, when you start out playing around with a Renko chart, it will feel like everything’s dumbed down and simplified. The fact that the bricks form at the pip value you set, will make everything look almost laughably simple – and that might not be a bad thing.

So your first task is to set the pip value. The lower pip values will, of course, make the bricks form more quickly as the price moves small amounts in any given direction. This means the chart will unfold with greater speed, which may make it seem daunting to anyone used to trading on the longer timeframes. And, indeed, the smaller pip values are used by traders who are using the Ranko chart for scalping. Traders who are accustomed to longer timeframes will want to slow the chart down by selecting larger pip values. Traders who use the daily chart might struggle with Renko and decide that ultimately this isn’t the tool for them. More on that later.

When you just begin playing around with a Renko chart, it’s probably worth your while setting the pip value quite low (say 10 pips, for example) because this will give you a chart that unfolds relatively quickly, which makes it easier to manipulate and test in a shorter time than a chart you set to, say, 50 pips. The 50 pip Renko chart will take too long to develop new bricks (unless you’re using it on a super-volatile currency), which will slow down your testing protocol.

The first thing you’ll notice with the Renko chart is that all of the bricks are the same length – that’s because you are the one who sets the pip value they represent. The second thing you’ll notice is that there are bricks of two different colours – one represents the price going long and the other represents the price going short. Depending on your platform, you’ll likely be able to go into the settings and change the colours if the default ones don’t suit you.

Renko and Reversals

You will immediately have noticed that no two bricks on the chart are next to one another. They always form at the corners. This has important implications for the way Renko charts record a change in the price direction and you will want to make sure you have your head wrapped around this properly so that it doesn’t trip you up.

For the direction in which the bricks appear to change, there has to be a significant change in the price direction. How does that work? Well, let’s say you’re looking at a Renko chart set to ten pips and the price of a currency drops thirty pips. That will form three bricks in the downward direction – that is, three bricks showing that the price is going short. But, from here, the price can drop a further nine pips before it forms a new renga brick in that direction. And if the price movement starts going long, it can make up those nine pips but it still won’t have formed a new brick. In fact, it can go long for another 19 pips (taking it all the way back to the start of the last brick that formed on your screen) and it still won’t form a new brick showing the upward movement. In fact, from our imagined point of nine pips below the latest downward brick, the price would have to go long for 29 pips before you’ll get a newly-formed brick in the other direction.

This feature of the Renko chart is really important to understand and to bear in mind when designing strategies that rely on using Renko. When the price changes direction – or reverses, you could say – it doesn’t just need to go back X pips, it needs to go back in the other direction 2X pips for it to show on the chart. This will, of course, impact how you determine your entry and exit points when actually entering a trade.

The Pros and Cons of Renko

While you’re sitting there, trying to get your head around this whole new approach to following price movements, it is also worth going over some of the pros and cons of using a Renko chart in your trading. We say “some of” because a lot of this is going to depend on the kind of trader you are and how you have set up your whole approach to trading. Renko is, after all, just one of the tools available to you and though it may seem revolutionary and even though everyone is talking about it, ultimately that doesn’t mean it will end up being something you use. This is worth bearing in mind when you look over some of the advantages it offers and some of the disadvantages inherent to using it.

The first pro is kind of a big one. It will be immediately obvious to you the moment you open up a Renko chart on your platform. This thing is easy to read! It cuts out all of the noise of a traditional chart and boils it down to its bare essentials. There are lots of people out there – and if you are one of them, there’s no shame in that – who even get distracted by the noise of traditional charts. Sometimes this can follow you for several years into your trading career. The fact is that noise can be a distraction and can muddle your decision-making particularly at the most critical junctures: choosing entry and exit points. Renko is basically designed with that fact in mind as a tool deliberately made to reduce noise down to a minimum. It does this by filtering out all price movements that are smaller than the pip value you selected for the bricks. There’s no way around it, this is a big deal. It enables traders to more clearly identify trends in price movements. One of the holy grails of forex trading. It makes it so that all you really have to keep an eye on is how the line of bricks is shaping up and which brick is coming next.

Now, while being able to more easily identify trends certainly looks like a huge pro for Renko, it does come with a proviso. Which is that with great simplicity comes great responsibility. In order to truly take advantage of the trends that show up in your Renko chart, you will have to formulate a strict set of rules for entries and exits and you will have to stick to them. And that’s where some of the cons start to wriggle out of the woodwork.

By taking away the noise, Renko charts also wipe out something that might be quite useful, they erase a lot of the detail. That can end up having a couple of effects that could seriously impact your trading. The first of these is that it can conceal sharp movements in the price that fall within the pip values of a brick. This can lead to sending you mixed up signals for trade entries and can also result in the whipsaw effect – where the price reaches the point at which a new brick is formed but then slips back the other way immediately.

To protect yourself from these effects, you’ll probably design a rule that means you enter the trade only once a trend is a couple of Renko bricks deep – that is, once two or more bricks show the price heading in one direction. The first side-effect of this is that it will eat into the profit you can take away from that trade (because you’ve already had to wait for two or more bricks to form before entering). The second side-effect is knowing where to set your exit.

Most people will probably see a trend until the bricks change color and direction. That’s not necessarily a bad way to do it but – If you remember that it takes a price reversal equal to two bricks worth of pips before you see a change on your Renko chart – you’ll realize that this will also cut into your earnings from a trade. In short, even if everything goes according to plan, you’re losing two bricks-worth from your entry and two bricks-worth from your exit. That can still result in a profitable trade if the trend runs far enough but it’s also worth remembering that things don’t always go according to plan.

If you open up a Renko chart for any currency pair, you’re sure to see these nice, runs of bricks going up and down across your screen. And, sure enough, Renko charts do identify some pretty nice trends from time to time. But, you will also see these places on the Renko chart where the bricks zig-zag, changing to one color and then quickly changing back. If you apply the rules we just discussed, waiting for two bricks to enter and a change back to the exit, then these areas of flux are going to seriously ruin your day.  

As well as cutting down on the detail of traditional charts, Renko also cuts down on the flexibility available to you. By setting the pip value that determines brick sizes on your chart, you are marrying your trading system to the volatility of the market at the moment you do that. As the volatility changes both in the market and across currency pairs, you’re going to want to adjust your Renko chart. Of course, switching the pip value is easy enough but the knock-on effects can be disastrous. As the volatility of a currency pair changes from day to day, you might find that the bricks on your chart are forming too quickly or too slowly but if you adjust the pip values, you are impacting the consistency of your system. Not to mention the fact that by increasing the brick size you are also losing more detail as far as the price movement is concerned. The alternative is to stick to one value and, ultimately, become a slave to it as volatility changes gear.

Finally, as far as the cons are concerned, there is the fact that Renko charts are only suitable for certain kinds of trading. They are more appropriate for traders who are looking to catch trends and who trade on shorter timeframes. Traders who are chasing reversals or those who prefer to trade on the daily chart are basically left out in the cold. Reversal traders will simply dump Renko as soon as they see it, simply because of the way Renko charts display changes in price direction. Daily chart traders, on the other hand, will feel they have to stay chained to their trading platform in fear of missing price movements on the Renko chart. With Renko charts, they simply cannot trade by logging in for half an hour each day and going over the day’s progress, because all they will see is the number of trades they have missed. In short, if you are a daily chart trader and you want to use Renko charts, you are probably going to have to completely change the way you trade.

Land of Opportunity

Just as a blank space on an old sailing map can represent both opportunity and peril to a seasoned mariner, so Renko charts can be both of those things to a trader looking for new territory to explore. Although there may be clear cons to the way Renko works with your current trading set-up, that doesn’t mean it is not a land of opportunity if you are willing to change up and develop new ways of doing things.

For example, the current set of indicators you rely on in your trading system will work completely differently on a Renko chart. Chances are, in fact, that they will probably turn out to not be applicable or will not work very well (if at all) with a Renko chart. However, there are literally thousands of indicators out there that might turn out to work even better. This is because of the hugely different way a Renko chart operates compared to traditional charts, resulting in the data it provides to an indicator being significantly different as well. This opens up so many possibilities – there are in actual fact an endless number of combinations that could turn out to be incredibly successful if you are willing to put the work in and try them out.

The only way to truly explore the potential of Renko is to devote the time and effort it takes to do some serious testing. Obviously, plenty of traders who have spent years on developing and fine-tuning a system that works for them (and, hopefully, works in an objective sense), will be unwilling to chop and change at this stage. On the other hand, of course, there is a huge cohort of traders out there who are still searching for a system that suits them and that works. Traders such as those will likely relish the opportunity to explore some uncharted waters and go in search of the undiscovered country.

For those willing to put in the time and leg-work it will take to work this out properly, Renko charts could be a source of both adventure and success – as long as this exploration is undertaken in a level-headed way. Be aware of the downsides, make sure you know the potential pitfalls, keep your head screwed on properly but, by all means, go and take Renko charts for a spin and see if they suit your trading style.

Categories
Forex Technical Analysis

The Core Principles of Technical Analysis

Most of the content about the technical analysis will try to give you a narrow view of how we approach this analysis. And there is a reason for that. People will want what they can understand, masses are not amused with complex analysis, only a handful of people will really dive into what this analysis has to say. Therefore, limiting the technical analysis to line drawing, pattern recognition, and candlesticks is also a limitation to what you can learn unless you do your own research. 

Learning technical analysis is not hard to do, it can be as deep and complex as you want or very simple. Interestingly, technical analysis guides and books tend to repeat the same ways and tools of doing it even though it is a very wide concept. When we talk about the basics, the most dominant technical analysis methods are the Price Action patterns, candlesticks, pivots, support and resistance lines, and trend lines. They are regarded as basic since they are derived directly based on what is seen on the chart. We would also like to add they are mostly subjective even with the “rules” that define them. Technical indicators are the second method of chart analysis, also called secondary indicators by some professionals as they calculate based on the original price action data.

Volume or volatility is the third technical dimension, often missed by some analysts but very important to professionals. The last technical analysis dimension we would like to add is the timeframe or time scope. As we move on to each of these concepts, you can find traders who are successful using just the price action or only indicators without much regard to fundamental analysis. The main idea behind this is that they do not want to be distracted by the news that may not be as important or true and only want to keep the analysis based on factual data – historic price movements represented as charts. 

PA patterns are created by the price movement on the y-axis and time on the x-axis. As these shapes and patterns repeated, analysts collected them, making several most popular patterns regarded as most reliable. The patterns serve to predict the future price action once they are formed, all of these patterns point the price will likely go up o down. The most common patterns are double tops and bottoms forming the letter W and M, cup and handle, ascending and descending triangles, and the head and shoulders.

There is no good statistical record of how reliable are these patterns as they are subjective, one analyst can see the pattern others do not, or the patterns can stack one inside the other. However, they are used in conjunction with other tools and timeframes. All this can make you wonder if there is any reason to believe patterns exist or the movement is random, at the end of the day it is just another element to help you decide. The final judge of your technical analysis is the account balance. 

Candlesticks have more information about the price movement than a single line. They have several structural elements: the body color, the wick, and the top and bottom body levels. Based on these, analysts have created a plethora of patterns that aim to predict when a trend or reversal is about. Similar to price action patterns, candlestick patterns reliability cannot be tested objectively, only you can test and fit them in with other indications. Candlesticks are essential to creating pivot points, moments where the price turned in another direction. 

Pivot points consist of at least three candles and they mostly serve to draw lines, be it support and resistance, trend, channel, or Fibonacci retracement lines. Some traders will draw lines where others would not, thus a definitive support or resistance line cannot be drawn for all. The same applies to trend lines and other constructs where their form will depend on the beholder. While support and resistance lines indicate likely price direction reversal once they are reached, their interpretation can also help breakout strategies.

Now traders can get confused about whether they should enter a trade on an S/R line breakout or wait for a reversal. Of course, the price will not exactly break through the support or resistance line or bounce right off it, you will mostly see something in between. Consequently, this presents a question of how reliable can such analysis be. If we use multiple questionable elements for one comprehensive analysis, one can wonder would multiple more reliable elements result in better technical analysis and therefore trading. 

These basic technical analysis elements form the complete picture for a pure PA trader, with the addition of volume. Volume cannot be represented by a candlestick alone, nor by observing PA patterns or any other basic technical analysis element. Volume is measured and is represented as a special tool. Traders mostly use it to confirm a trend is emerging, to confirm a breakout, and also to exit any trades if the market is not active enough. Some trading strategies rely on low volume markets or sessions to avoid surprise movements. If we combine volume with other technical analysis tools, the result is almost always beneficial. Some strategies use volume or volatility to filter losing trades, others use volume for entries. 

Secondary indicators are derived from the price action statistics, numbers. At its base, they are formulas that give out a number of values. These values can be presented on a chart or in some other form in a separate plane. The basic secondary indicator is the Moving Average. MAs are very common and can be calculated in so many ways to reflect a specific price action interpretation. They can also contain other measurement values in an effort to be more reliable, lag less, and so on. One such example is the Volume Weighted MA where volume is also included in the calculation.

How a trader will use MAs depends on his goals and imagination, adding more different MAs can produce various uses, or, as some professionals do, use the MA and the price on the chart to produce trade signals when they cross. Indicators can be very complex to include many factors derived from the price action, to the point they represent complete trading solutions. Unlike PA patterns, support and resistance lines, and other subjective basic technical analysis tools, indicators are exact since they are based on data numbers. However, this does not mean they are reliable as reliability depends on the formula and how it is interpreted. 

The basic principle of technical analysis is the combination of several indicators. Some professionals just rely on how the chart looks to them and make trade decisions based on that. They do not need anything exact. Others need exact points, values, signals to the point their complete money management is based on this analysis. There are also mixed type analysis, PA lines, and patterns combined with Moving Averages and volatility indicators. The goal is to use the right combination that collectively gives meaning to a particular trader.

It is not only about combining several tools but also combining timeframes. The analysis will likely be more reliable if other time scopes are included. This will help traders to pinpoint optimal trade exits and entries and also see the bigger picture of what is going on in the market. Some strategies may require lower timeframes such as 5 minute or 15-minute candles, while other systems may work only on the daily timeframe. After all, technical analysis will become unique to a particular trader, aimed and aligned to his goals and personality. Also, be wary of over-optimizing and overcomplicating technical analysis, it is not going to result in the best performance.

Categories
Forex Basic Strategies

The Most Simple Yet Effective Scalping Strategies You Must Know In 2020

Introduction

The Forex market consists of are several types of traders. They are broadly classified based on the time frame traded. For example, swing traders use time frames like 1H or 4H, while positional traders analyze the 1D or 1W time frame. Similarly, there are “scalpers” who trade the 1-minute and the 5-minute time frames. Note that scalpers are different from day traders, as they do not consider the 15-minute or 1H time frame for their analysis.

What is Scalping in Forex?

Scalping is a type of real-time technical analysis, where traders make several trades in a small period. Scalping involves entering and exiting from the market within a few minutes and moving on with the subsequent trade. This type of traders aims for tiny profits rather than home runs.

Scalping is usually most popular among forex traders than those trading stocks and commodities. This is because the FX market is the most liquid and volatile market. Thus, traders make use of this benefit by extracting 10-20 from the market in a short time. Since scalping involves making of few pips on a trade, they are traded with big volumes.

Getting Started with Scalping in Forex

Now that we know the basics of Forex scalping, let’s discuss the analytical side of it and then understand some powerful scalping strategies as well.

Timeframe

The ideal time frame to the scalp is either 1-min or 5-mins. However, some traders get an outlook from the 15-min time frame too.

Take Profit and Stop Loss

The most critical part of scalping is to have a take profit and stop loss on every trade. Since you will be using the 1-min time frame, the profit or loss level should be within 5-10 pips. It is risky to keep the TP and SL greater than ten pips when the analysis is based on the 1-min time frame.

Volatility and Liquid

Volatility and liquidity are other vital points of consideration before scalping any market. Forex is indeed the best market to the scalp as it offers the needed volatility and liquidity. However, you must select the right pair to trade because not all currency pairs offer enough market volatility. There are pairs that barely move on the 1-min time frame, and thus traders must end up waiting several minutes on a trade. Hence, it is recommended to trade only major pairs and a few minor pairs.

Spread

Spread plays a major role in scalping as it greatly affects the P/L of the trade. For instance, let’s say the spread on EUR/USD is two pips. The pip value of the pair is $10. If one lot is traded, the expense of the trade would be $20. Now, if a trade yields you four pips, then the net profit would be $40 – $20 = $20. We infer that 50% of the profit gets deducted as a fee. Thus, scalpers always have an eye on the spread.

Forex Scalping Strategies

Scalping strategies are unlike strategies used by swing and positional traders. Scalpers do not wait for several confirmations before entering a trade. Instead, they aggressively enter after a couple of confirmations. Here are some scalping strategies made for non-conservative traders.

Scalping using Moving Average

This scalping strategy, two moving averages – the 5-period MA and the 20-period MA is used applied onto the 3-min charts. Let us understand the strategy with a couple of examples.

Firstly, we must have a look at the overall direction of the market. Note that this strategy is only for trending markets, not ranging markets. In the below chart of AUD/USD on the 3-minute time frame, we see that the market is in a clear downtrend.

Secondly, the five period MA must be below the 20-period MA. When the price action tries to break above five-period MA (yet below the 20-period MA) and falls back into MA, we can open short positions.

The stop-loss must be placed above the high of the candle that broke below five-period MA. One must exit the trade when the price reaches up to 1:1 risk-reward or at a profit of 5 pips.

Scalping using price-volume charts

Indicators are not a must to scalp in forex. Scalping is possible solely using price action concepts. And here is a strategy for the same. This strategy works on a small time frame used on any currency pair. However, we’ll be sticking to the 3-min time frame for all the strategies.

Below is the chart of AUD/USD on the 3-minute time frame. According to the strategy, we can take entry when the market breakthrough a range strongly with high volume. In the below example, we see that the price fiercely broke above the range with high volume too. This is a confirmation that the big buyer is back into the market. Thus, we can take a long position right after the candle closes above the range.

The stop-loss can be placed below the low of the candle that broke through the range and places the take profit at a 1RR ratio. Note that, the stop-loss and take profit must exceed above 10-12 pips.

Scalping using Support and Resistance

Scalping at support and resistance levels is the most popular technique in the forex industry. Yet most traders apply it illogically. Even though the textbook says to buy at the support and sell at resistance, it cannot be applied practically incorporated in the market as there is a pinch of psychology in it. According to this strategy, one must buy at support and sell at resistance only if there is a false breakout prior to it.

Consider the below chart of NZD/CAD on the 3-minute time frame. The gray ray represents the support level. It is seen that the price broke below the support thrice and came right back above it. Thus, one can enter when the price is holding above the resistance post the fake-out. The stop-loss and take-profit for all such trades much be a maximum of 5 pips.

We hope you found these strategies interesting and helpful. If you are an aggressive trader, do try them out and let us know the results in the comment section below.