The most frequently asked question I field about Renko Charts is: what box size should I use? In the following paragraphs I will explain why the only honest answer I can give is actually “it depends.”
But first, just to make certain the article is going to make sense, let me briefly explain how Renko charts work. Renko charts use a “flexible” candle or box size, which you determine when you load the indicator onto your charts. Take a look at this example here for a Futures Renko chart.
As price moves up your designated number of pips, a new blue (bullish) candle will form. However, if a new candle opens (let’s say the Box size is 10 pips) and then price falls 20 pips, a new red (bearish) candle will close. This is since price must move ten pips either above the previous close or perhaps below the previous opening in order for a new box to appear and close on the charts of yours.
This is what makes Renko charting so attractive to so many traders…the lack of wicks and the lack of numerous candles that fail to go anywhere but which cause your various indicators to give off a mixed variety of Buy and Sell signals, none of which have any validity.
Finding out how Renko candles form and close then gives rise to our FAQ: which box size works best when trading the Renko charts?
As mentioned above, the only honest answer is “it depends” and what it depends upon is what kind of forex trader is using Renko charting.
Some traders actually are best suited to be long term traders. They have a tendency to focus on hourly or maybe four hour charts and watch for new trends to develop, jumping in once said trend is actually spotted and hanging in because long as they can to bank a maximum number of pips.
These kinds of traders should use larger box settings, such as twenty five or maybe thirty pips. In case price moves up twenty five pips and forms a new box, it must move DOWN by fifty pips in order to open a new box in the opposite direction. In case you’re familiar with trading pairs like the GBP/USD or maybe the EUR/USD, you understand that big price reversals such as these do not take place all that often. Once a trend is established in one direction, that trend will normally continue for 100-200 pips. Using a large box setting like 25 or 30 will eliminate those counter signals you might get using a 1 hour or 4 hour chart (those signals that cause you to exit a trade early, before another big move in your direction).
Some other traders actually are a lot more attracted to scalping and the sort of quick profits you are able to make on a 5 20 pip move. By using a 3 or 4 pip box size setting, these traders are in prime position to see every mini-trend as it forms and are able to buy and sell numerous times in any given hour during the London and NY trading sessions, banking 5-20 pips in profit each time.
When I respond to the question “which Renko box size should I use?” my response will always ask the trader to perform a little self-analysis and determine whether they are a long-term trader or a scalper. Once I know the answer to that question, I can give them a more specific answer than “it depends.”