Renko Stop and Reverse Forex Strategy

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Renko Stop and Reverse Forex Strategy

Trending markets that extend for such a long time are one of the most profitable markets that a trader could trade. This is especially true if the trader could catch the beginning of a trend and exit when it ends. You might have heard of trades that are caught right at the beginning and closed right down to the end, and this might have made you envy, whishing that you also traded the same setup. However, these trades are very rare. Truth be told, it is very hard to predict where the market is going. Millions of traders out there have their own opinions of the market, and all of them have different views, which affects price.

However, it is still possible to catch these types of trades, even without trying to predict where the market is going. How do we do that? By being in the market all the time.

But you may be thinking this is rubbish. It is crazy to stay in the market without first trying to assess where it is going. Well, we will be using a different chart that would give us an indication of a trend.

The Renko Chart

The word “renko” comes from a Japanese word which means brick. In a while, you will understand why this chart is given that name.

The Renko Chart is a chart based on a mathematical formula, in which the primary concern is price. Unlike the regular candlesticks, it doesn’t concern itself with time, only price. It measures price based on a formula and whenever price advances by a certain amount, a Renko box or brick is created.

This is what a Renko Chart would look like.

Renko Stop and Reverse Forex Strategy 1

Blocks are plotted red when price declines by a certain number of pips, and boxes are plotted blue when price advances by a certain number of pips. Notice how clearly defined price moves are.

Regular candlesticks, with all its proven advantages, also have its setbacks. Candlesticks are plotted with consideration of time. Originally, it was created with the daily charts in mind. But with today’s advances in technology, prices could be plotted in different timeframes, even up to the minute. The problem with this is that exchanges and brokers are based in different timeframes. A visible candle pattern on a 4-hour chart may not be the same candle with another broker because of the differing time zones where the candles are based on. Also, price moves may occur even just a few minutes after a candle has closed. These creates candles, which doesn’t include those relevant price moves. Candles which traders base their trading decisions on.

Unlike the regular candlestick chart, the Renko Chart removes all these nuances by focusing on price alone.

Notice how clearly defined a trend is on the Renko Chart.

So, how do we cash in on these trends?

The Buy Setup – Entries, Stop Losses & Exits

This strategy is based on a confirmed price momentum based on the Renko Charts. This confirmed momentum would be based on the third consecutive box where price is going the same direction. As soon as price plots a third box, we should be entering the trade. To do this, we will be putting stop entry orders to enter the trade.

Buy Entry Order: A pending buy stop order should be placed above where the third box would be plotted, based on the previous boxes.

Stop Loss: The stop loss should be placed three boxes below the entry box, where the box changed color.

Trailing Stop Loss: The stop loss should be trailed the same distance away from the current price based on the boxes, until it is stopped out in profit.

Renko Stop and Reverse Forex Strategy 2

This trade gained 104 pips while risking only 15 pips on the stop loss. That is a risk reward ratio of almost 1:7. There were three instances where price plotted red boxes in between the trend. These would represent retracements. However, since our stop loss was trailed three boxes below the current box, the trade was not prematurely stopped out.

The Sell Setup – Entries, Stop Losses & Exits

Sell Entry Order: A pending sell stop order should be placed below where the third box would be plotted, based on the previous boxes.

Stop Loss: The stop loss should be placed three boxes above the entry box, where the box changed color.

Trailing Stop Loss: The stop loss should be trailed the same distance away from the current price based on the boxes, until it is stopped out in profit.

Renko Stop and Reverse Forex Strategy 3

This trade would have gained 188 pips while risking only 15 pips on the stop loss. That would have been a risk reward ratio of 1:12.5. Again, several instances of retracements occurred in between the downtrend, but it was not until the latter part of the downtrend when the trade was stopped out.

Conclusion

This strategy’s strength is also its weakness. It was mentioned earlier that the Renko Chart doesn’t take time into consideration. Because of that, there is no fixed time wherein the trader should be coming back to the charts to check what had happened. Boxes will be plotted anytime the criteria for plotting one is fulfilled. Also, since the boxes are plotted using a mathematical formula, the levels where the boxes are plotted shifts as price moves. Since price is dynamic, the boxes also become dynamic.

With these two setbacks, the main thing to consider with this strategy is active management of pending entry orders and stop losses. For a scalper that might not seem to be a problem, since they are used to sitting and waiting in front of the charts. But for swing traders, this would pose a problem. Swing traders go back to their charts at fixed times, but with this strategy, that might not work. Some swing traders using this strategy had an alarm programmed wherein wherever a third box is created, an alarm would be sent to their emails. That might work.

Another caution with this strategy is also that since boxes are plotted based on the movement of price and doesn’t take time into account, there will be instances where several boxes would be quickly plotted at almost the same time. This is often true with news spikes. Though it is possible to profit using this strategy during spikes, because the stop loss is manually trailed, wide spikes which retraces back or reverses could cause a loss. This is because manually trailing a stop loss could take a few minutes if you’re not in front of the chart, while spikes could happen in seconds.

Also, since this strategy is based on a three-box advance, this strategy would not work in a ranging market with a range of 3 to 6 boxes. But these losses on the 3 to 6 box range could still be covered by the wins on the trending markets caught from start to finish. Because the strategy tries to catch the whole trending move, the risk reward ratio is often big.

Lastly, the main advantage of this strategy is that it is a type of stop and reverse strategy. This is because the trailing stop loss is also the pending stop entry order which should be triggered if the market reverses. This allows traders to catch all the big moves that the market does, whether it is a reversal or a breakout from a range.

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