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Is day trading or swing trading better with Renko charts?

Monday, February 20, 2017 14:52
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(Before It's News)

Renko charts are part of the time-independent charts such as Point and Figure, Kagi and Three Line Break. These chart types are unique because they only consider price and not time. Time, as you know is plotted on the x-axis of the stock chart and price is plotted on the y-axis. With time not being a factor for the above mentioned chart types, they allow the analyst to get some unique insights into the market or the security that they are researching.

Renko charts are one of the ways an analyst can chart the security’s price without focusing on time. It is purely based on price and the Renko chart is unique as the graph is represented as a ‘brick’. The name Renko is said to have come from the Japanese name, Renga, meaning brick, aptly reflecting it visually.

The chart below shows a typical Renko chart. In this example you are looking at the Renko chart for Apple Inc. (AAPL) with the setting of a $1.

1-Renko-Chart-AAPL

Renko chart example for AAPL with a box size of $1*

In a Renko chart, a new brick or box is formed when price moves a determined number of ticks or points. This is the fundamental difference, because in a candlestick or a bar chart, a new candlestick or bar is plotted when a new session opens. This could be the daily session or 30 mins/60 mins and so on for the intraday time frames. Because Renko charts only focus on price and not time, the bricks can often be used in identifying trends and also trading with technical chart patterns.

For a chart type that is independent of time, the common question that comes to mind is whether a Renko chart is better suited for intra-day traders or for swing traders. Those who have dabbled in both these forms of trading know how vastly different the approach and the mindset can be. For example, you might need to be quite on your feet, trading with tight stop losses and booking profits frequently when you are day trading, while with swing trading you might need to leave some breathing room for your trades such as setting relatively wider stop losses and waiting for a few days, if not a week for the trade to realize its potential.

With a conventional chart type, the question of day trading or swing trading is as simple as switching to a 5-minute chart or a daily chart and trading based off the appropriate indicators or trading strategies. The chart below shows a daily chart time frame and a 5-minute chart time frame for Apple Inc. You can see that the chart time frame allows for day traders and swing traders to choose the appropriate time frame and trade accordingly.

2-day-trading-swing-trading-chart

Daily chart and a 5-minute chart used by swing traders and/or day traders respectively*

How can you distinguish day trading or swing trading for a time-independent chart?

While is it clear that a regular or a conventional chart type can be easily switched around different time frames to suit one’s day trading or swing trading style, the answer is a bit more complex when applied to Renko charts. It is complex, but quite simple once you understand.

There are two variables on a Renko chart that you can change so that it suites either a swing trading style (let’s call it long term trading) and day trading style (scalping). The two variables are base chart time frame and the Renko box size itself.

What is the base chart time frame in Renko charts?

In order for Renko chart to plot price, the chart requires a data source. Ideally a tick size is used, but in its absence, a 1-minute chart or any other time frame can be used. The base chart determines the closing prices.

For example, if you had a 5-minute base chart for AAPL, and you were trading a $1 box size, then if price moved from $130 to close at $135.10 within a 5-minute time frame, this would be plotted as five Renko bricks. Now if you were using a 1 hour chart, where price pulled back at the last few minutes to $132.00, then if you used the 1-hour chart as the base time frame, you would see only two Renko bricks.

This might seem complicated to understand but it really isn’t. You can read the article on the base charts for Renko here to get a more thorough understanding on this concept.

The chart below gives a visual explanation if you observe closely. The top row has a $1 fixed Renko chart (top right) based off the daily closing prices (top left) as shown in the candlestick chart. The second row shows a 5-minute candlestick chart on the left corner with the $1 renko box size depicted to the right. Now if you compare the renko charts based on daily close and 5-minute close you can see how differently the Renko bricks are plotted.

3-base-chart-renko

How the base chart influences the Renko chart*

Changing the Renko box size

Changing the Renko box size is in fact similar to switching between different time frames. For example, a $1 Renko chart is not the same as a $0.25 Renko chart. You can see that it is easier to day trade a $2.5 Renko chart than a $1 Renko chart.

4-Renko-charts-different-box-size

Comparison of a $2.50 and a $1.00 Renko chart*

The different dips and rallies in the price chart above shows how the trends are depicted, relative to the box size in question. A swing trader for example could have seen the downtrend on the $2.50 Renko chart and would have continued adding to positions until the downtrend was broken. On the other hand the day trader, scalping the $1 Renko chart would have been able to go long as the dips and exit at the turn of the next bearish Renko chart.

The above can be further customized by selecting a smaller base time frame, such as a $1 Renko based off a 5-minute base chart or using a $2.50 Renko chart based off a daily chart time frame, leading to numerous trading possibilities.

So, to answer the question as to whether swing trading or day trading is more profitable with Renko charts, it essentially comes down to a trader’s preference. By taking into account the risk management as well as the equity in one’s trading account, an appropriate trading style can be adopted for Renko charts.

Remember that there is no right way or wrong way to trade and one must simply focus on getting familiar with a certain style and settings of the Renko chart in order to start trading confidently.

*Note: All charts created by Tradingview Renko charts.

About the Author

Ranga is a Renko chart enthusiast and has been writing about Renko charting techniques on his blog, Renkotraders.com. For traders who are interested in this unique charting technique, Ranga offers a host of free and informative resources which will help you to get acquainted with Renko charting and also introduce you to various trading strategies based on Renko charts.



Source: http://www.zentrader.ca/blog/is-day-trading-or-swing-trading-better-with-renko-charts/?utm_source=rss&utm_medium=rss

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