E-Mini Trading: Candlesticks Are Great, But I Prefer Renko Bars
I’ve been spending some time in recent articles describing different e-mini charting techniques. Specifically, we have been looking at different methodologies to characterize raw price data. We have discussed candlestick charting, range bar charting, and tick charts. This article will deal with one of my favorite topics and most used charting technique. We will be discussing Renko bars.
My e-mini trading style is devoted exclusively to scalping, or carving out small chunks of price movement in a broader trend. As a scalper, I try to limit the parameters and variables that traders with longer investment horizons must take into consideration. In short, I am interested in momentum and, more specifically, price action. Renko charts are rare in that they deal only with price; there is no consideration is given to quantity or time.
Renko charts have their basis in Japanese futures trading and are considered to date back several centuries. The term “Renko” comes from the Japanese information “Renga” which method brick, and have been popular among Forex traders in recent years. The Renko system resembles stacked bricks when they are forming in a trend. I have been using them for several years to trade e-mini contracts with great success. Let’s take a close look at some of the rare characteristics of Renko system.
The size of each Renko brick is determined by the e-mini trader.
If prices are very idle, or static, there may be very little movement in the Renko bricks.
The Renko trading system are use to track trends and filter out inessential market noise.
Unlike range bars, Renko bricks to generate a brick only when the price has moved the predetermined number of ticks in a single direction.
Renko bricks can be calculated at the start of a new brick or at the close of a new brick.
Now let’s get down to some of the basics in using the Renko systems in an e-mini scalping system. One of the most difficult jobs I have as a trading educator is discouraging students from taking trades during periods of market noise. (Market noise is a period of time when the market is going by normal backing and filling operations and not trending.) By using the Renko system, market noise (which is sometimes referred to as a period of consolidation) is filtered out because consolidating markets characterize very little directionality in price. When using Renko bars, consolidation periods appear as several Renko bricks; this is in sharp contrast to a traditional candlestick chart where consolidation periods appear as an extended grouping of a very firmly spaced candlestick bars. (candlestick charts are generally based upon a time variable) During periods of thin range bound price action, Renko bricks will only will add new bricks when the price action has moved the trader stated period of time in one direction. In short, most of the noise common in time-based candlestick charts or multidirectional range charts is deleted.
In my trading, I typically use either 4 or 5 tick Renko charts. It is not uncommon for me to experiment with these tick settings to determine which setting gives me the clearest view of the actual price action occurring on the chart I am observing. Further, I will generally allow at the minimum two bricks to form in one direction before I consider taking a trade in the direction in which the bricks are moving. There are several generally accepted ways to clarify directionality when using Renko bars. Some systems draw hollow bricks when the market action is moving to the upside and substantial bricks when the market action is moving to the downside. In my trading, I use the traditional red and green coloration rare to candlesticks to indicate the market directionality. Red Renko bricks indicate the market is moving to the downside, and green bricks indicate the market is moving to the upside. Further, I have found it is most effective to calculate Renko bricks at the close of the bar, as opposed to the beginning of the bar. This is, of course, a matter of personal preference; but I find that using the closing price fits well with my trading system which requires me to begin trades only at the close of a bar.
In summary, we have only touched a few of the advantages that the Renko system offer. We have noted that this system is ideal for identifying trends and minimizing market noise. Further, we have identified some specific settings where an e-mini trader can begin and emphasized that adjusting the Renko tick settings now and then may make the trends clearer and easier to understand. Of course, specific tick settings with Renko bars should be set at an e-mini trader’s discretion. Finally, I have emphasized that in my trading using the scalping style, the Rinko system is ideal because I am very trend oriented and Renko bars are priced based and were designed to clarify trends based on price, not time or quantity.
As a quick observe, information about Renko bars can be difficult to find and time should be spent practicing with this system before implementing it with your live trading. In the end though, I speculate most e-mini traders will find the Renko system is a superior methodology to implement into their scalping strategy.