Renko Trading Strategy Part 1

Understanding Renko Trading Strategies

Introduction to Renko Trading

• Praveen Patil introduces himself and his 14 years of experience in the stock market, welcoming viewers to a video focused on using Renko charts for daily trading.

• He emphasizes that no trading strategy guarantees success, but a successful strategy should have an accuracy ratio of over 80%.

• The discussed strategy claims an approximate success rate of 87%, applicable across various instruments and time frames.

Setting Up Renko Charts

• Praveen uses the TradingView platform for charting, highlighting its user-friendly nature and accessibility on multiple devices.

• He explains how to convert standard candlestick charts into Renko charts by changing the default settings.

• The first step involves removing wicks from the Renko candles to eliminate noise and focus solely on trends.

Basics of Renko Charting

• Praveen describes the simplicity of Renko charts, which consist only of bullish (green) and bearish (red) bricks.

• He outlines a basic trading approach: buy when a new green candle forms and exit upon seeing the first red candle.

Historical Context and Effectiveness

• The video delves into the historical use of Renko charts since the 1830s, particularly among Japanese traders who were notably successful despite limited tools.

• Praveen notes that these traders relied on simple strategies rather than being overwhelmed by numerous indicators available today.

Practical Application of Strategy

• He discusses how many valuable insights were lost during World War II but emphasizes ongoing efforts to uncover effective trading secrets from history.

Understanding Renko Bricks and Their Impact on Trading Success

The Importance of Brick Size in Trading

• Key to success: 80% of trading success hinges on understanding Renko bricks, particularly defining the brick size.

• Two methodologies for defining box size in software: ATR (Average True Range) and traditional methods.

• Traditional method used by Japanese traders since the 19th century focuses solely on manual box size definition.

Historical Context of Box Size Definition

• ATR was introduced in the late 1970s, not part of original Renko charting methodology.

• Research indicates that early traders defined brick size using half of the nine-period average of absolute range.

• Absolute range is calculated as high minus low over a specified period; example given with a hypothetical range.

Evolution and Challenges in Defining Brick Size

• Original formula for brick size has faded due to an influx of indicators post-1960s, leading to confusion about proper definitions.

• By the 1980s, knowledge about defining brick sizes diminished; reliance shifted towards newer indicators like ATR.

Resurgence and Modern Strategies

• Despite losing focus on traditional methods, recent interest in Renko charts has been rekindled through modern strategies and tools.

• Introduction of ATR led to renewed discussions around Renko charting; many software companies are now incorporating these techniques.

New Methodologies for Defining Brick Size

• After extensive research, a new strategy combining old systems with ATR is proposed for easier brick size definition.

Understanding Time Frames and Brick Sizes in Trading

Defining the Right Time Frame

• The concept of time frames is clarified; there is no "right" time frame, but rather a focus on the appropriate brick size relative to the chosen time frame.

Adjusting ATR for Personal Strategy

• The default Average True Range (ATR) for Bitcoin on a daily time frame is 529. The speaker plans to halve this value to create a custom trading strategy.

Implementing Box Size Changes

• The box size is adjusted from ATR to a traditional methodology, setting it at 265, which is half of the ATR value. This adjustment facilitates real-time Renko chart plotting.

Trade Entry and Stop Loss Management

• A trade entry example illustrates using a green brick as an entry point, with stop loss adjustments made after the formation of subsequent candles.

Importance of Specific Numbers in Trading

• Emphasis on numbers like three, nine, and thirteen in trading strategies reflects historical practices observed in Japanese trading methodologies.

Revising Stop Losses and Trade Management

Utilizing Historical Trading Practices

• Historical documentation highlights that Japanese traders focused on specific numbers for disciplined trading approaches based on their market structure.

Revising Stop Losses Based on Candle Formation

• The initial stop loss is set at the base of the previous red bar; subsequent revisions occur only after new bars are formed, maintaining position until a red candle appears.

Flexibility Across Different Time Frames

• The method can be applied across various time frames; determining brick size remains crucial regardless of whether one uses daily or 30-minute charts.

Calculating ATR Values Across Different Instruments

Adapting Strategies for Various Markets

• For different instruments like Dow Jones or crude oil, similar calculations are performed to determine appropriate ATR values and corresponding brick sizes.

Consistency in Brick Size Calculation

• For crude oil's 15-minute chart, an ATR value of 0.22 leads to defining a box size at 0.11 by halving it for effective trading analysis.

Maintaining Volatility Awareness Over Time

Monitoring Changes in Market Volatility

• It’s emphasized that understanding volatility through ATR requires regular updates every seventh period to ensure accuracy in defined box sizes.

Long-Term Considerations for Daily Charts

Intraday Trading Strategies and Brick Size Definition

Understanding Short-Term Trading Strategies

• The strategy discussed is primarily aimed at intraday players and short-term positional traders, focusing on holding positions for no more than two to three days.

• Traders should monitor the Average True Range (ATR) over a 14-period to identify significant changes that may affect their trading decisions.

• Backtesting this strategy can be challenging; it requires continuous recalculation, which took the speaker approximately three years of live testing to refine.

Defining Brick Size for Success

• The speaker emphasizes the importance of defining brick size correctly, suggesting paper trading for six to seven months to grasp its significance.

• A simpler method proposed involves using half of the ATR 14 value as the brick size, streamlining the process compared to traditional methods.

• Successful definition of brick size is crucial; it does not depend on the instrument or time frame but rather on how well it is defined.

Practical Application with Indicators

• An example using Nifty illustrates how to determine ATR values and set appropriate brick sizes for trades.

• The Super Trend indicator is recommended, with a suggested setting of a 10-period and a multiplier based on backtested results.

• Properly defining brick size accounts for about 80% of trading success; remaining efforts focus on entry and exit strategies.

Chart Analysis Considerations

• When analyzing charts, it's advised to ignore certain candle formations that do not contribute meaningfully to trade decisions.

• The speaker provides an example using USD/CAD currency pair, demonstrating how ATR values influence trade setups.

Time Frame Selection in Trading

• For Forex traders, shorter time frames like five or ten minutes are often utilized alongside defined brick sizes.

• In Bank Nifty trading examples, determining ATR values helps establish effective entry points based on market conditions.

Understanding Risk and Time Frames in Trading

Defining Maximum Risk

• Traders should identify the maximum risk they can afford to lose, which helps in defining their trading strategy.

Choosing the Right Time Frame

• For example, when trading Indian Nifty, if a trader cannot risk more than 50 points, they must analyze charts to determine which time frame accommodates that risk.

Personalizing Trading Styles

• The focus should be on personalizing one's trading style by understanding how much one can afford to lose rather than seeking a universally "right" time frame.

Setting Stop Losses

• A practical approach involves setting a stop loss at half of the defined risk (e.g., 25 points for a 50-point stop loss).

Discipline in Trading

• Once a trade is entered within a specific time frame (like 30 minutes), traders should stick to that time frame until the trade is completed without switching between different frames.

The Importance of Time Frames and Brick Size

Intra-day Trading Insights

• Engaging with charts less than two hours classifies one as an intra-day player; thus, trades should ideally be exited by day's end.

Renko Trading Strategy Overview

• The Renko trading strategy works effectively for short-term traders (2-3 days), emphasizing the need to redefine brick size every seventh period of the chosen time frame.

Success Factors in Renko Trading

• Understanding and defining brick size accurately is crucial for achieving an 80% success rate in trades using this strategy.

Reviving Traditional Methods in Trading

Historical Context of Renko Charts

• Many traders have forgotten traditional methods; this video aims to revive these techniques used historically by Japanese traders with Renko systems.

Simplifying Chart Presentation

• Renko charts are praised for their simplicity and effectiveness; success hinges on correctly defining brick size rather than complex strategies.

Indicators and Their Role in Trading

Understanding Indicators

• While indicators can assist traders, true understanding comes from reading price movements directly rather than relying solely on indicators as derivatives of price action.

Suggested Indicator Use

• A suggested quick solution includes using a Super Trend indicator based on specific parameters while encouraging experimentation with various indicators across different time frames.

Conclusion: Key Takeaways for Traders

Final Thoughts on Brick Size

Technical Analysis Success Strategies

Key Insights on Trading Success

• The speaker emphasizes the importance of achieving at least an 80% success ratio in trading, suggesting that this is a critical benchmark for effective trading strategies.

• A promise is made to share more "secretive methods" related to technical analysis in future videos, indicating a focus on advanced techniques and insights.

• Viewers are encouraged to engage by sending questions via email, which suggests an interactive approach to learning and addressing individual concerns regarding trading strategies.

• The speaker expresses gratitude towards viewers for their attention, reinforcing a community-oriented atmosphere around the content being shared.