Mechanical trading system based on

Renko chartsBy Forex Formation

The Renko Charts

• The Renko charts are a type of price chart developed in Japan which only shows price movements; time and volume are not included. The Renko charts are constructed by placing a brick or box in the next column once the price exceeds the high or low of the previous brick by a predefined amount.

• The trading signals are generated when the direction of the trend changes and the bricks alternate colors.

• Trading systems based on Renko charts offer the possibility to get most of a trend while limiting losses. In this systems, losses are kept to a minimum.

Example of Renko Charts

Introduction to the trading system

• Renko charts are quite effective to clearly define support and resistance levels and also ignored much of the market "noise“. However, Renko charts also could have noise.

• To filter the trading signals generated by Renko charts we can use the following set of indicators:

• Exponential Moving Average (EMA) of 7 periods. 

• Stochastic oscillator (14, 3, 3). 

• Parabolic SAR (0.09, 0.2).

• MACD histogram with a 5-period EMA to find price divergences.

Trading system rulesThe rules to open a new buy/sell position are the following:

• Buy signal: Bricks on Renko chart change color from dark to white. This is a signal of a possible change from bearish to bullish trend.

• Sell signal: Bricks on Renko chart change color from white to dark. This is a signal of a possible change from bullish to bearish trend.

To eliminate o eliminate many false trading signals generated by the Renko charts in the next slide we present a series of filters based on technical indicators.

Trading system filters• The price (Renko chart bricks) must be above (long position) or

below(short position) the EMA of 7 periods. 

• The stochastic has to cross the level 20 from below (long positions).

• The stochastic has to cross the level 80 from above (short positions).

The trading signals from the Renko chart must match the Parabolic SAR signals.

• The Parabolic SAR should be below the price for buy signals.

•  The Parabolic SAR should be above the price for sell signals.

Example of the trading system

• indicated above.In the following image we can see various examples of trading signals generated by this system. In this case, we take into account just the signals which all filters

Example description

• The trading signals are indicated by blue arrows

• In first place, a posible trend change is indicated by a change of color in the Renko chart bricks.

• These trading signals are confirmed by the Parabolic SAR, EMA of 7 periods and the stochastic oscillator.

• In this example, all trading signals produced profitable positions that generated profits.

• However, as all trading strategies, this system can produce false signals. 

Recommendations for this trading system

• This trading system produce better results in market trends.

• As in any trading system, the traders should use money management techniques to protect their account during periods when there is a streak of losing trades (drawdown).

• It is recommended to test the system with a demo account.

Source of information

• This trading system was extracted from:

http://forexformation.com/mechanical-trading-system-based-on-renko-charts/

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