When trading a Renko system trade setup, it is important to have developed setups that have multiple components. This is done in contrast to trading single patterns or indicators. By using multiple component system trade setups, you will be able to eliminate trading the low odds conditions that a single component trade may have.
For instance, what if you are trading a system setup that is most effective when price continues its direction, but you enter the trade when momentum is counter to this direction? Would you expect this trade to consistently be profitable just because you have an indicator trigger for the trade?
This trade setup component example will become more clear when I discuss the chart below for our the midline reject Renko system trade setup and taking counter momentum trades.
Read More: Renko Setup Components
Renko System Trade Setup And Momentum
The midline reject trade setup typically comes after the chart price envelope reverse changes swing direction. And as such, it is intended to show price continuation and is often used as an addon trade setup.
But the midline reject can only be traded if a chart read of our 2 momentum indicators confirms the trade. This is how this Renko system trade setup goes from a single pattern setup to becoming a setup with 3 components:
- The midline reject is a Renko chart pattern of 3 or 4 bricks, where a counter brick ‘rejects’ the line inside of the red and green price envelope dots
- The fast momentum indicator [yellow line] must hook at the extreme in the direction of the trade
- The slow momentum indicator [blue-purple lines] must continue to flow in the direction of the trade at the time of the counter-reject brick
Renko Chart Midline Reject System Trade Setup
To understand the 3 Renko setup components for the midline reject trade more completely, look at the chart below and yellow circle1, which is a ‘textbook’ 3 brick midline reject trade setup:
- After the price envelope reverses from sell to buy [green dots on the bottom], there is a red Renko brick that retraces to the midline – this is the counter brick in the pattern
- Fast momentum breaks above the upper extreme and then back below it on the counter brick retrace and then breaks back or ‘hooks’ above the line
- The fast momentum hook goes above the upper extreme for a buy and shows momentum continuation in that direction
- Slow momentum continues to flow upwards in the buy direction on the counter brick retrace – especially note how close slow momentum is in the middle of its range and thus how much continuation room there is before it becomes extreme
This midline reject + slow momentum flow + fast momentum hook, multiple component Renko system trade setup, becomes a very good trade. As you can see, this trade gives 10 3 tick bricks of price continuation and profit before the counter brick.
In contrast to the yellow circle, midline reject Renko system buy discussed above, now look at the Renko system chart and the 2 blue circles at the left of the chart. Are these 2 blue circles also showing midline reject buy trades that are similar to yellow circle1?
The answer to the question is no – WHY – look at the momentum indicators at the time the trade would be taken.
In both cases, slow momentum is flowing down against the buy direction. Additionally, neither Renko system trade setup would have a fast momentum hook.
So, although we have the midline reject setup pattern, we don’t have the momentum components that are required for the pattern to be traded. You can also see the implications of trading this ‘late’ in a swing and entering against a momentum extreme – both of these trades if taken would be losses.
Counter Momentum Midline Reject Trade
I will discuss all of the circles and potential trades marked on the chart in the Renko system trading video. But I want to comment further on trading the counter momentum midline reject trades at the blue circles – or in other words, trading the pattern without concern for the multiple momentum setup components.
Not only would both of these trades having been losers, note what would have happened to the purple circle price extreme reverse sell. Instead of this system setup being a winning trade, it would have been reversed at blue circle1 as a loss.
Click Link To Watch Video: Renko System Setup Components