A Guide to Trading Cryptocurrency Part 4: Renko Charts
Read Part 3 of BTCManager’s series, ‘A Guide to Trading Cryptocurrency,’ here. In Part 4, we look at a very easy to pick up technique that, like the Ichimoku Kinko Hyo, originates from Japan.
Renko charts are another Japanese technique that is easy-to-use and reliable for making profitable trades. Similar to candlestick charts, Renko charts are even easier to analyse as these charts abstract from time and volume, focusing only on a substantial part of the price action.
Consider the Past and You Will Know the Future
There are individual blocks that form Renko charts, known as bricks or Renko candles. It may be the case that the actual name for the chart, Renko, comes from the Japanese word for bricks, ‘renga’ (レンガ).
For a Renko chart, a brick is only drawn in a certain direction on the chart if the underlying asset moves by a certain amount. The size of the brick is decided by the user. For instance, if there is a green brick, indicating that the market moved higher by a fixed amount, a new green brick is only drawn if the market advances by a predetermined amount. Therefore, bricks in the Renko chart are always the same size.
The Renko chart only uses closing prices for a given trading session. This can be daily, 4-hour, 1-hour, etc. So, for instance, if you look at the 4-hour chart, a Renko will either form or it will not form at the end of that 4-hour trading session, depending on whether the market has moved the predetermined amount. No matter how big the markets moves are, numerous Renko candlesticks will be used to display this on the chart. For example, see the 4-hour Renko chart for ZCash below, where most of the chart is for the period immediately after the launch, which saw some crazy volatility.
Given its simplicity, trading techniques used in conjunction with this chart are limited compared to other indicators. Nevertheless, the signals that are given are profitable and reliable. Trend reversal signals are given when a string of green bricks is followed by a single red brick or vice versa.
Also, Renko charts can be used to identify breakouts and key areas of support and resistance. A higher risk strategy can also be used for trend continuation, where you can place limit buy/sell orders at the high/low of the current Renko candle.
Since the Renko charts abstract from time, these strategies are not for the impatient. It may take hours, days, even weeks for a new Renko candle to form. Using lower timeframes like 15-min or 1-hour, you will see more activity than on higher timeframes. However, the advantage from abstracting from time is that you uncover the underlying trend and eliminate any ‘noise’ that may distract your trading.
For many cryptocurrencies, the weekly Renko candles have yet to be formed or show little action. For example, the chart below shows that ETH-USD has only formed five green bricks on the weekly timeframe, with another one that is projected. These are shown in a different color as they are not complete yet, as at the time of writing, it is a Sunday.
Once we enter into Monday, the full Renko will form as a new week starts, as shown below. The weekly close for the week ending May 28 was $168.28 so two new, green bricks formed. Also, notice that since volatility was higher in the previous week, the Average True Range has decreased, requiring a smaller downturn to confirm a reversal.
Another thing to note is that the Renko chart will not look the same as time goes on. For example, the entire history of BTC-USD is shown below with the 4-hour timeframe. As time has progressed, the Average True Range, which is used to calculate the predetermined distance for a brick, changes. So when looking at the chart below, it does not accurately represent the history, as looking at a 4-hour Renko chart say at this time in 2016, the Average True Range was different.
The chart above demonstrates the power of the Renko chart. For instance, using this method, the buy signal given during April 2017 would have allowed you to capture bitcoin’s rise from around $1200 to beyond $2000. As BTC-USD reached its all-time high, a green brick was formed and showed that the bullish run formed a peak at $2620.38. Three 4-hour sessions later, a red brick was formed, giving an indication to enter into a short position at $2312.10, or for buyers who bought on April’s signal, to take profits from long positions (giving a profit of around $1112.10).
For those that shorted at $2312.10, they would hold onto their position until the 4-hour Renko chart displays a new green brick. Until then, they must wait it out for the signal to be given, and you would check the charts every four hours at the end of the trading session to see if a new, green Renko had been formed. Once formed, those in short positions should take profits and enter into a long position.
So for example, on the chart above, if we have no positions in the market, we wait for one of two events. Firstly, if the market reverses and moves back above $2466.24 and holds until the close of a 4-hour session, a new, green brick will have formed, giving a signal to buy. Therefore, we check every four hours to see if a new, green brick is displayed and buy at or around $2466.24. Alternatively, since the current trend is down, we can enter into a short if there is trend continuation. For example, we set limit sell order around the low of the current brick, that is at $2157.96.
The logic behind this is that it is likely another red brick will form if the market breaks below the low of the current Renko. It is a higher risk strategy than waiting for another Renko to form, as the market may just briefly dip below this level and not reach the required level to form another Renko.
Trading with Renko Charts
Let us look at another concrete example, using the 15 minute timeframe for ETH-USD. Looking around May 26, we see that the first red Renko brick formed and gave a signal to go short around $178.9998. You should hold onto the short until the first green Renko appears, which in this case, gives the signal to exit the trade around $163.2057. Notice that sometimes you get fake signals like the folliwng signal to buy around from the same first green Renko. However, using a momentum indicator as well, such as the Relative Strength Index (RSI) can help you avoid fake signals on lower timeframes. For instance, when the green Renko is formed on May 26, the RSI is below 50, telling us that downward momentum is in play. That should alert us not to take the Renko signal.
Therefore, we could also take the short trade again from $157.94 to $142.1469 and again from $131.6175 to $121.08810 on the other two sequences of red Renkos since the Relative Strength Index is below 50. However, when the RSI approaches 30, the oversold zone, we look for the first green Renko and take that signal to buy. Since when the market is near 30 or below, it is suggested to be exhausted and the preceding move will unwind and reverse.
After waiting for the green Renko to appear, we see that it gave us a buy signal around $121. Therefore, we enter into a long position (or liquidate short positions if they are open) around this price and wait for the first red Renko when the Relative Strength Index starts to indicate the market is overbought, that is near 70. Notice that a red Renko forms, but is a fake signal, and another over the course of May 27-28. Notice that the momentum is becoming more skewed to the upside as the Relative Strength Index is rising and moves above 50, suggesting we should ignore any sell signals. However, on May 28, the Relative Strength Index rises to 67.4 alerting us that we should exit the long position on the next red Renko, as the market is nearing overbought conditions.
The first red Renko forms, prompting an exit around $178. The market then cools off with the RSI returning near to equilibrium around 50, and we could have entered into a long again (since the RSI remained above 50) on the next green Renko, giving an entry at $205.3233. At the time of writing, this position would still be open as a new, red brick has not yet formed and we would exit on the next red Renko since the RSI is indicating overbought conditions. Remember, since the timeframe is 15 minutes, we have to check every 15 minutes to see if a new Renko is displayed on the chart.
Another strategy that can be displayed on the same chart is breakouts. Renkos can also indicate key areas of support and resistance. For instance, the chart below shows that the low of two red Renkos coincides forming a support level at $168.4704. However, shortly afterward, a red Renko candle formed and broke below this level; a bearish breakout. Therefore, we could enter on this signal at $163.2057. We see that green Renko candles then formed but only re-tested the support level and the support was confirmed to turn into resistance. If a green Renko candle formed above $168.47, then we would have cut our losses. However, in this case, the resistance level held and the market continued downwards, forming another series of red REnkos.
We then wait for next sequences of green bricks, exiting on the first one. The first green brick gives us the signal to exit at $136.88. Another example is shown later on, but this time it is a bullish breakout. Notice that the peak of a green Renko forms a resistance at $179.05131. On May 29 the market breaks this resistance level as a green Renko closes at $184.2645, giving us the signal to buy immediately. Since the resistance at $179.05131 is confirmed to be broken, we expect further upside.
As May 29 goes on, ETH-USD pushes higher and peaked on the morning of May 30. Then the first red Renko forms giving us our exit at $205.32 and hence to take profit on the long position around this level.
Keep it Simple, Stupid
Many Japanese trading techniques are not used in the West, but when interpreted correctly and utilized as such, they can help you achieve amazing results. The Renko chart is a simplistic, yet effective, method that abstracts from time, focusing purely on the most important price action. When the market moves a predetermined amount, a brick is drawn and the main advantage of using Renkos is to identify trend reversals. When looking at these charts, take note of the current trend and get ready to enter once the first Renko forms that goes against the market’s preceding direction.
Renko charts can be found on TradingView.com, but only premium members can access intraday Renko charts, which is a testament to the strategy’s effectiveness. Alternatively, you could draw these charts yourself as they did in days past, but it is a cumbersome process. Those with basic accounts can access daily, weekly, and monthly Renko charts, which should still give you the opportunity to identify some nice entries into profitable, long-term trades on cryptocurrencies such as bitcoin, ether, and litecoin.
You can read the entire series of BTCManager’s ‘A Guide to Trading Cryptocurrency’ here.