SPOTTING MICRO CHANGES IN TREND SENTIMENT: RENKO CHARTS

Finding the trend direction and points where the trend would be considered being reversed
is valuable for entering trades, but one of the largest challenges facing the forex
trader is to know when sentiment has changed and turned against the trader and then get
out of the way. When it comes to detecting the earliest form of change in trend direction,
the trader should consider renko charts. Renko means brick in Japanese and provides a way of smoothing out the noise of the market. A renko chart provides an ability to represent
a predefined move in the price. While each candlestick or bar provides the low,
high, open, and close of a sample period, renko charts provide an additional renko block
only if the price has moved and closed at the predetermined setting. In other words, if
the trader wants to know only if there is persistence in the sentiment, seeing consecutive
renko blocks would confirm that the market is showing the ability to push further
brick by brick. This is very useful, and we will show you how to use renko blocks in
combination with other indicators to enable precision exiting.
Figure 10.7 compares renko visualization of price action and with the standard candlestick
variation. Each renko block is set here at one pip move. This means that if the
price closes one pip higher or lower, a new block is added. The time interval is one
minute. The trader can choose any time frame and setting appropriate to his or her goals.
However, the value of renko blocks is mostly at the smallest setting generating information
to the trader about the patterns in the sentiment that are difficult to detect with other
charts.

In effect, we can see that the currency pair exhibits varying degrees of patterns of
sentiment. The ability to generate a consecutive series of new up blocks or new down
blocks reveals clearly whether a strong micro trend is in place. At points A and B, we
see a reversal of the pattern. There will always be some reversals. In this case, one or
two renko blocks should not be perceived as the end of the previous pattern. In most
recent series of blocks, at the right end we see a downtrend. The trader seeing this chart
who was already in a sell position would interpret this last formation as permission to
continue to stay in that position. We will demonstrate how to use renko in combination
with several setups and strategies later on.
By mapping the price action along key support and resistance lines and finding trend
lines, the trader creates a foundation for shaping the trade. We can see that one can
go even further by examining intraday, intrahour, and even micro-trend directions using
three-line break and renko charts to show patterns of bull or bear bias. The key advantage
of using three-line break or renko charts is to reveal whether the sentiment of the market
has changed either at the large time frames or the smallest time frames. It is a tool worth
exploring.




By ABE COFNAS