Forex Trading Renko Redux - Renko Box Trading

Average Directional Index is an indicator used in technical analysis as an objective value for the strength of trend. ADX is non-directional so it will quantify a trend’s strength regardless of whether it is up or down. ADX is usually plotted in a chart window along with two lines known as the DMI (Directional Movement Indicators). ADX is derived from the relationship of the DMI lines. The DMI lines will give you the direction needed for trading.

ADX Trend strength

I use an adapted version of ADX in order to determine trend strength and trend direction. Trend strength is determined by the use of two moving averages, the first is an moving average calculated on top of ADX2, the second moving average is calculated on top of the first moving average. This results in the below chart, Trend Strength is considered sufficient for opening positions when blue is greater then yellow.

ADX Trend Strength Indicator

ADX  Trend Direction

A very traditional ADX. Green is greater than Red means buy direction and vice versa

ADX Trend Direction Indicator

In a traditional chart you might want your moving average to not be too reactive, in order to filter out some chop (sideways moving market), but the renko chart already takes care of some of that so I wanted a very reactive moving average.

I finally settled on a T3 derivative. In order to determine direction and trade triggers. I use a fast T3 and tow slower ones. The fast T3 needs to have crossed both slow T3s in order to determine directions.

Moving Averages Direction Indicator

Forex Trading Renko Redux - Renko Box Trading

In technical analysis, a chart that does not account for volume or time, that is a renko chart. A Renko Chart is a series of small bricks, each representing a change in price instead of time. When a price goes above or below a previous price, a new brick is added to the chart. A white (green) brick represents an increase in price while a black (red) brick represents a decline. A renko chart is useful because it can help technical analysts find support and resistance levels accurately.

The attached chart gives you EURGBP with a box size of 8pips, as you can see it has potential the difficult part is to set the right boxsize for your strategy. Sounds easy right?

EURGBP with a box size of 8pips

In my quest for the correct boxsize I have been going back and forth. At first it started out as a pure gutfeeling. You know you have been trading this currency for a while and you have developed a good feeling so you are the best judge how to set the boxsize. Well it might work for you, it did for me (for awhile), but my guess is you then will hit a moment that it does not work anymore, after awhile you will adjust your “gutfeeling” and it wokrs again, but you might have lost your account in the process

So I started looking for a more quantitative approach. The main advantage would be that I could actually integrate this into an EA and I would not rely on my gut so much. So renko box charts are based on price movements, pips up and down, not on time. It is very important to realize that a renkochart might not create a new bar for hours and then create multiple in a matter of seconds!

So I started looking at indicators that have a direct relation with price and after awhile I started focussing primarily on ATR.

Now have a look at what the ATR does:

The Average True Range is an indicator of volatility. It was developed by J. Welles Wilder in 1978. As well as the many other indicators, first it was created for the commodity markets, which are more unsteady than shares, and for the prices at the end of day. Nowadays it’s widely used in Forex market, on other periods too.

First Wilder defines the True range, or TR, determined as maximal of the following 3 values: absolute value of a distinction between ongoing maximum and the previous close price; absolute value of a distinction between ongoing minimum and the previous close price; distinction between an ongoing maximum and an ongoing minimum. If the distinction between a maximum and a minimum is rather little, most likely other two aforesaid methods will be used for TR calculation. If the range changes inside of the period, a distinction between a maximum and a minimum, is rather big, most probably TR will calculate from it.

Formula: ATR = Moving Average (TR_j, n), Where TR_j = maximal modules from three values |High – Low |, |High – Closej-1 |, |Low – Closej-1 |.

Or in short ATR gives an indication of the DAILY (I only look at daily) volatility, difference between high and low. 

So I started to calculate boxsize as a function of ATR.

Accumulate Daily ATR and the ATR over 7 and 14 periods, then divide by three. This formula has given me good results on EURUSD, GBPUSD, EURJPY, USDJPY, EURGBP.

This way the ATR fluctuates and so my box size fluctuates a little bit over time, adapting to changing circumstances, more or less volatility.

Forex Trading Renko Redux - Renko Box Trading

Metatrader4 is my platform of choice, it allows for easy manipulation, coding and is available from a large number of Forex brokers. I am in the process of developing and Expert Advisor that will automatically trade my system, this is a work in progress. I currently have a first version which I am testing to see whether the entries are what they are supposed to be.

As soon as I am happy with this EA I will release the EA for your use. I am currently thinking about how and under which conditions it would be best to release it.

Forex Trading Renko Redux - Renko Box Trading

So in this last 6 years what have I learned? Two most valuable lessons. First – trading is all about discipline and patience. Second – trading is about continuous adaptation of your trading style to market and personal circumstances.

Discipline and Patience

It is obvious but worthy of repeating. Discipline, discipline, discipline! Pick your system, learn all its ins and outs, and then stick to it. If the market makes you wait, just wait. Patience is the key to any system actually working.

Adaptation

The other part of a successful trader is the ability to adapt. When the market goes upside down, or your personal availability changes you need to adapt your system. Choose a better timeframe, adapt stoploss and takeprofit levels is the minimum, sometimes you also need to change your action triggers, which indicator you use in which circumstance.

Anyway I am sure this all pretty obvious, but how do we actually do this?

Forex Trading Renko Redux - Renko Box Trading

If you still ask yourself the why and what. This is not the place to be. It should be evident to you that Forex Trading is a good way to add to your monthly income, if you have the skills and the ability to successfully trade this very volatile and largly unregulated market.

So how do you successfully trade this market?

Either you are a skilled trader, with a dose of discipline and patience. Or you will have to resort to a mix of hands on and hands off trading, or in other words automate your trading. This is what this blog is about!

I have been trading the forex market since 2005, in these six years I have tripled my net worth, and lost it all multiple times. I have learned some very valuable lessons which I will share with you in this blog. I am also going to share my current trading and the trading bot (Expert Advisor) that I am in the process of finetuning.

Hope you enjoy it and learn something

Forex Trading Renko Redux - Renko Box Trading