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S&P500 Futures Chart: How to use Renko charts to maximize your profits

Among the many different things that determine a trader’s success, knowing when to call it a day on your trade is important. Many a times you will find traders who are great at analyzing are particular market such as the S&P500 futures market and timing their trades, but they tend to do a horrible job when it comes to know how to treat their trades.

It is therefore, my belief that knowing when to exit from a trade is in fact a tougher choice than know when to enter a trade. Beginners to trading are at higher risk because they tend to focus too much on entering a trade. Having a tendency to exit winning trades, or as its famously called, cutting the losers short is an aspect that every beginner day trader has dealt with.

In the futures markets, the E-mini index futures contracts are one of the most popular contracts and it is the S&P500 e mini futures also known as the ES futures which are the most widely traded contracts for the average day trader. This view is only validated by the CME Group exchange’s daily trading volume which shows the number of contracts being traded on a day to day basis.

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ES S&P500 Futures Daily Contracts or Average Volume (Source: CME Group)

Due to the structure of the contracts, traders can make significant profits when they how to effectively day trade the e-mini futures. This means know when to respect the market and exit with whatever small profits the markets give you and knowing when to stay on to the trade when the market threatens you but you are confident that price will continue to move in your favor.

It is this decision, knowing when to hold on to a trade that can be the difference between a winning and a losing strategy. Most day traders hold on to a trade, on hopes that it will move in their favor, while some scalp for a few ticks, like looking for bread crumbs.

How to objectively trade the futures markets?

Emotions can play a big role in the markets when trading. In order to minimize this, traders need to make use of some tools in order to bring some objectivity to their trading. For example, you could use the average true or ATR indicator. The ATR can be a great way to determine the volatility on the instruments that you are trading. While the ATR typically has a 14 period setting, you can set it to 5 or 10. The only thing to remember is that with an indicator such as ATR you will need to have a setting that is more skewed towards sensitivity than being smooth. Now that you have the ATR ready, you can then apply this onto the Renko charts. The next picture below shows you how the ATR and the Renko charts on the S&P500 futures chart work out together.

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Renko Chart with 5-period ATR

With the ATR now set up, the next step is in determining the take profit and stop loss levels. There are basically two ways to determine this.

Option 1: In this case, take the ATR value and multiply by 3 and use this value to add or subtract from your entry to set it is as take profit level. Then, take the ATR value and multiply by 2 or 1.5 and subtract or add to your entry to set it as a stop loss level.

In the above example, assuming you were shot at 2281.00 and ATR was 0.34, then the target would be 0.34 x 3 = $1.02 (rounded to $1.00) and 0.34 x 1.5 = 0.51 (rounded to $0.50). Thus, if I was short at 2281, my target would be 2281 -1.00 = 2280 with stops at 2281.50.

Option 2: In this second option, you can simply trail your stops at a certain level until you get stopped out. So, if you were short ES futures at 2281, your stop loss will be 2281.50 and you will calculate the ATR and continue the equation and change your stop loss on every new Renko bar that is formed.

The trick is in understanding how good your analysis can be. There are certainly no limitations on the profit targets that you can make and by using option 2 you can basically stay in the trade until a major correction stops you out. The problem with most beginners in trading is that they can become quite excited about a winning trade and end up taking their profits rather quickly.

What makes this unique is the combination of the chart type itself. First of all, Renko charts are best in showing you price trends. You won’t find any choppy price action, although in all fairness you will find Renko boxes plotting side by side when markets are really trading flat.

However, by sticking to this rather simple set up of ATR and Renko charts, beginner day traders will be able to build their confidence gradually until it becomes second nature for you to know when to exit and when to keep your trades running.