Home > Renko Chart Comparative Analysis – An alternative to multiple time frame analysis

Renko Chart Comparative Analysis – An alternative to multiple time frame analysis

Multiple time frame analysis is a commonly used technical analysis approach. The basic premise with multiple time frame analysis is to use of two or more different chart time frames to analyze a market. Typically, the longer time frame chart is used to ascertain the main/major trend, while a smaller time frame is used for timing the entry or exit based on the analysis.

When it comes to Renko charts however, the concept of multiple time frame analysis has a twist. Because time is not fixed on Renko charts–like it is on a daily chart for example–is multiple time frame analysis possible with Renko charts? Luckily it is.

Renko charts are based on a “box size,” so traders seeking different perspectives on movement can simply use different box sizes. When the different charts (using different box sizes) confirm the price action in the other, this is called confluence.

For example, traders can conduct analysis on charts with 100 pip, 50 pip and/or 25 pip box sizes. A new box isn’t created, showing the price movement, until the price has moved 100, 50, 25 pips respectively; this helps filter out some smaller price movements. We call this, Renko Comparative Analysis, which is using two or more box sizes of the same asset/instrument on the Renko charts.

Multiple Box Size/ Renko Comparative Analysis

With Renko Comparative Analysis, traders identify the trend and find support and resistance levels on the larger box size Renko chart. Like more traditional charts, trendlines can also help identify the trend.

Traders then apply this information to the lower box size Renko charts, revealing insights that may have been missed had a trader focused on just a single box size renko chart.

As an example, let’s look at the EURUSD 100 pip and 50 pip Renko box size charts.

The top chart is a 100 pip box size and the bottom chart is a 50 pip box size.

Note that the 100 pip box size chart reveals price action going back much further in time than the 50 pip box chart.

renko comparative analysis
(click to enlarge)

The 100 pip box size charts show the longer-term movement, and is smoother in appearance. The 50 pip box size chart shows more detail in the price movement.

Price action traders use this comparative analysis of Renko charts in order to trade within the bigger trend. If the 100 box is in an uptrend we only look for buying opportunities on the 50 box chart, and can also use the 50-box chart to sell current long positions. If the 100 box chart is in a downtrend, we only look for short trade opportunities on 50 box chart, and can also use the 50 box chart to exit current short positions.

In the charts below we add a 10 and 30 period simple moving average to both the 100 pip and the 50 pip Renko chart.

renko comparative analysis with moving averages

The charts above show a couple ways that the multiple time frame analysis can be used. Starting at the left, the 10 period moving average (MA) moves above the 30 period MA on the 100 pip box chart. This indicates a likely uptrend. This uptrend is then marked on the 50 pip box chart. While the 100 pip box is in an uptrend, when the 10 period MA crosses above the 30 period MA on the 50 pip box chart it is a buy signal (both charts now in uptrend).

On the right, the 100 pip box chart is in an uptrend when a sell signal is triggered on the 50 pip box chart. This is a potential opportunity to exit current long trades.  Later the 100 pip box chart moves into a downtrend (2014-09-17), and it is now time to watch for short sale signals on the 50 pip box chart.  This movement of the longer-term chart into a downtrend helps confirm the earlier decision for selling and could be used to confirm other short trades taken.

The crossover strategy is just an example and not necessarily a recommended way to trade–trading also requires risk control, position sizing and a verification (testing) that a strategy works.  Everything in regards to how you will enter and exit trades should be laid out in your trading plan (made before you start trading real money). Crossovers work well in very trending markets, but produce many losers or flat trades during sideways market conditions, like those seen on the 50 pip box chart in mid-2011. This period would have resulted in multiple trades and poor performance. During major moves higher or lower the cross-over strategy can produce bigger returns; the charts also show several examples of this trending environment.

Renko comparative analysis is a tool you can add to your own tested methods to gain additional insight, or to spot trends and/support and resistance levels you may not see on a single time frame (or box size) chart…or if using a different chart type.

Renko Chart Comparative Analysis Summary

The above chart compares two different Renko box sizes, applied to a simple moving average cross-over strategy (as an example, not necessarily a recommendation). The confluence of the different Renko box size charts is an alternative to relying on a single Renko chart.

Traders can make use of their favorite analysis methods and simply apply them to a Renko chart or multiple Renko charts with different box sizes.

About the Author: Ranga is a technical analyst who trades using Renko charts. He blogs at http://renkotraders.com about trading with Renko charts, including Renko analysis and trading strategies.