What Is A Trading Method
The Renko trading method is a group of 3 indicators and setups used for chart reading strategies that capture different price moves. And very important to note a trading method is not a mechanical trading system.
Consider price movement that a chart may show:
- Price swing reverses that can begin a new directional move
- Price swing extremes that begin a directional reverse
- Consolidation and sideways movement inside a tight range
- NOTE: I have used the word directional for price moves instead of trend, as these strategies are shorter term.
The Renko method focuses on trading price continuation and reverses. Therefore, trading is not done inside of chart consolidation. Also, using Renko charts and bricks for trading strategies has been an advantage.
The Renko trading method combines trading indicators to trade price moves in the following way:
- Price swing and momentum beginning a new trading swing
- Price and momentum continuation after the initial move begins
- Price swing reverses after a momentum extreme
The trading method and setups are based on the concept that momentum leads the price movement. There are 3 method setups and 3 indicators. The Renko trading indicators are momentum indicators of different conditions and speeds:
- Momentum reversing from positive to negative or negative to positive
- Fast momentum resumption after a price retrace
- Slow momentum continuation during the price swing or reverse from an extreme
Renko Trading Method Price Envelope Reverse
The price envelope reverse is the most ‘basic’ trade setup for the Renko day trading method. This setup trades momentum reversing through a zero line. The momentum reverse shifts the price envelope dots. Additionally, the price envelope reverse has a slow momentum component.
- Price envelope indicator: sells have a red dot shift to the top, and buys have a green dot shift to the bottom.
- Slow momentum indicator: sells have the blue line below the purple line, and buys have the blue line above the purple line.
- NOTE: Both of these indicator conditions must exist at the time of the trade.
The circles on the chart are price envelope reverse trade setups. However, the orange circles would not be traded. Why?
What Is A Trade Setup Filter
The Renko trading method uses a strategy called a trade setup filter. The use of a trade filter is what differentiates a trading method from a mechanical trading system.
The trade filter avoids trading setups for specific conditions. And this could include eliminating a ‘base’ method setup. The objective is to avoid trades that have lower trading odds than intended.
Consider Renko method filters:
- Trades entered directly into price support or resistance
- Trades entered inside of price consolidation
- Trades entered into momentum extremes or divergences
All 7 circles are price envelope reverses with the dot shift component. Do they also have a slow momentum setup component? The yellow circles are tradeable. But the orange circles are trade setups that are filtered for price lines or momentum:
- The trading method views the gray line as an inside price.
- An inside price is a resistance line when the price is below and support when it is above.
- The lavender line is a trendline that acts as resistance.
To trade a price envelope reverse, there must be 3+ bricks of room to a price line. As you can see, none of the orange circles meet this trade setup criteria. Additionally, orange bricks 2 and 4 would be traded against momentum.
Price Envelope Reverse Trade Management
Trade management for the Renko trading method – consider 2 contract trading:
- Use an initial partial profit target of 4 bricks, with a target of 8 bricks on contract 2.
- Use an initial stop loss of 4 bricks on each contract.
- Yellow circles 1 and 2 would be profitable trades.
- Yellow circle 3 is not a filtered trade. There is no trendline at the trade time.
- As filtered trades, orange circles 1, 2, and 3 are not losses. However, the outcome for orange circle 4 is not known.
