My Trading System – the Renko Chart

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.