How To Use A Japanese Roenko Chart To Create A Trading Strategy

Transcription

1 TIPS. 10 SKYSCRAPER. Menara Carigali, Kuala Lumpur. The todays third tallest building in Malaysia on the scale of 267 metres high. 1/ 3 ALGORITHMIC TRADING WITH RENKO CHARTS. PART 1: How to define trend direction and local highs and lows.

2 RENKO TRADING. PART 1: How to define trend direction and local highs and lows. Renko charts are a fascinating chart type. They are a kind of simplified point & figure chart, easy to read and great for trend following strategies. This and the next two Trading Tips will show you how you can use this chart type to construct a simple trading strategy. You will learn how to read this chart, how to program a trading strategy and how to combine different chart types in one trading strategy. STRATEGY DESCRIPTION The general idea behind this trading strategy is a trend following approach. Therefore we will have to find out if there is a trend and define its direction. In the next step we will use the local highs and lows for the entry and exit. If our trend detection thinks that there is a bullish trend in the market, we will go long if the market makes a new high. To close the long position we will use the local lows. If the market makes a new low, this will be our exit signal. Additionally some kind of trailing stop to lock in profits and reduce risk will be required. If done, we will have a fully automated trading strategy that can be tested for profitability in any given market. DEFINING THE TREND & LOCAL HIGHS AND LOWS Let us start with the definition of the trend first with a classic approach which uses two moving averages. If the short average is above the long average, and the market trades above the short average, this will be our definition of an up-trend. Don t worry about the period of the moving averages, when the strategy is done Tradesignal will find the perfect period using the built-in optimizer. Because this is quite a simple concept, which can be found in any beginners guide to technical analysis, we will also use the local highs and lows so the quality of the trend detection itself is not so important. While bar charts or candlestick charts offer no objective and satisfying solution, Japanese Renko charts are the perfect choice for defining local highs and lows. Similar to point & figure charts, they show the price without a continuous time axis and are constructed from boxes, each box representing a specific price change. For example, a Renko chart where one box represents 10 points and the markets moves up 100 points, the Renko chart will show you 10 bullish

3 boxes; regardless if this move takes place in one day or one year. If the market moves less than 20 points, no new box will be drawn. To reverse the direction a minimum counter move of at least 10 points will be needed. As you can see, this simple box algorithm filters out small price moves, so the fuzz is being removed and only significant price moves are plotted. Now have a look at the chart and you will see how easy it is to define local highs and lows in an objective way: A local high is defined as the point, where the Renko chart changes from bullish boxes to bearish boxes. That s all! The following comparison between a candlestick chart and a Renko chart speaks for itself. Figure 1: Renko charts show trends and reversals in a clear and objective manner. Hence they are a very good tool in a simple trading system.

4 PROGRAMMING THE INDICATORS. Using this definition of local highs and lows we can write a short script to calculate these points on the Renko chart and show them on a candlestick chart. The calculation of the highs and lows is done with the following Renko Master indicator. Two global variables above were used in order to pass this information to the following Renko Slave indicator, which in turn plots the Renko highs and lows on a classical candlestick or bar chart by plotting points or circles (see code 2). // definition of global variables Variables: renko::hi, renko::lo; // if there is a bearish renko today and there was a bullish renko yesterday, then // yesterdays close (+1 renko) is a local high if close<high and close[1]>low[1] then renko::hi=close[1]+(high-low); // if there is a bullish renko today and there was a bearish renko yesterday, then // yesterdays close (-1 renko) is a local low if close>low and close[1]<high[1] then renko::lo=close[1]-(high-low); Code 1: Equilla code for the Renko Master indicator meta: subchart(false); // get the renko local highs and lows and plot them on the barchart drawsymbol(renko::hi); drawsymbol(renko::lo); Code 2: Equilla code for the Renko Slave indicator

5 DO IT YOURSELF MANUAL. How to chart this graph on your own and see local highs and lows from the Renko chart on another chart? Very simple: 01. Open a chart of your underlying 02. Add the same instrument as a sub chart below 03. Set one of both charts to Renko 04. Drag and drop the Renko Master indicator onto the Renko chart 05. Drag and drop the Renko Slave indicator onto the candlestick chart Figure 2: Using the Renko Master and Slave indicator the local highs and lows from the Renko chart are transferred to the bar chart. The box algorithm filters out small price moves, so only significant price moves are plotted.

6 By implementing both indicators a significant step towards our Renko trading strategy is accomplished. In our next issue we will add a trend detection and colouring of the chart based on the trend direction, which will mark another step forward. The third issue of our Renko trading strategy series will provide a programming code which defines the entry and exit rules. Take care, take profit, Philipp Kahler Senior Quantitative Analyst at Intalus 2014 Intalus www. Distribution allowed under a Creative Commons Attribution-Noncommercial license: Tradesignal is a registered trademark of Tradesignal GmbH. Unauthorized use or misuse is specifically prohibited.

7 ABOUT THE AUTHOR. Philipp Kahler. Philipp is the Senior Quant Analyst at Intalus. He was born in Austria and studied electrical engineering before joining a large German bank where he developed fully automated trading strategies for the proprietary trading department. His book about designing successful trading strategies has been among the top sellers in Germany for the last two years. Currently at Intalus, he is responsible for the in-house training of institutional traders and the development of custom-made algorithmic trading strategies. You may contact Philipp at philipp.kahler@

8 TR DING TIPS. 10 RENKO TRADING. PROFIT FROM THESE TR DING TIPS & VIDEOS TOO. TIPS. 01 TIPS. 07 TRADING TIPS 07 SCAN FOR CANDLE PATTERNS. TRADING TIPS 01 SCAN FOR THE BEST. SCAN FOR THE BEST. How to find the best performers out of hundreds of stocks in seconds. How to find the best performers out of hundreds of stocks in seconds. SCAN FOR CANDLE PATTERNS. How to find the best risk/ reward opportunities based on candlestick patterns. TIPS. 02 How to find best performing stocks and the best risk/reward opportunities by identifying promising candlestick patterns. TIPS. 08 TRADING TIPS 02 SPEED UP YOUR DECISIONS. SPEED UP YOUR DECISIONS. How to creat your own equity basket. How to create your own equity basket. TRADING TIPS 08 INDICATORS ON INDICATORS. INDICATORS ON INDICATORS. TIPS. 03 Simple steps to advanced analysis. Simple steps to advanced analysis. TIPS. 09 TRADING TIPS 03 TRADING TIPS 09 AUTO-ADJUST POSITION SIZE. How to create and trade an optimal portfolio. AUTO-ADJUST POSITION SIZE. How to create and trade an optimal portfolio. UNLEASH THE FORWARD CURVE. How to visualize forward curves to maximize information. TRADING TIPS 04 TIPS. 10 2/ 3 SKYSCRAPER. Petronas Twin Towers, Kuala Lumpur. The todays tallest building in Malaysia on the scale of 452 metres high. HIGHLY EFFICIENT SHORTING. HIGHLY EFFICIENT SHORTING. How to identify and profit well from a short trade. How to identify and profit well from a short trade. ALGORITHMIC TRADING WITH RENKO CHARTS. 10 SKYSCRAPER 02. Petronas Twin Towers, Kuala Lumpur. The todays tallest building in Malaysia on the scale of 452 metres high. 3/ 3 TRADING TIPS 05 RULE-BASED TRENDLINES. How to use point & figure trend lines in candlestick charts. ALGORITHMIC TRADING WITH RENKO CHARTS. TIPS. How to use point & figure trend lines in candlestick charts. TRADING TIPS 10 PART 2/3 Long or short? The colour of the chart will tell you! PART 2: Long or short? The colour of the chart will tell you! TIPS. 05 RULE-BASED TRENDLINES IMPROVE DISCIPLINE. How to visualize forward curves to maximize information. TIPS. 04 ALGORITHMIC TRADING WITH RENKO CHARTS. PART 3: How to assemble all components to a full trading strategy. SKYSCRAPER 01. Menara Carigali, Kuala Lumpur. The todays third tallest building in Malaysia on the scale of 267 metres high. CONTROL YOUR RISK. UNLEASH THE FORWARD CURVE. TRADING TIPS 10 PART 3/3 ALGORITHMIC TRADING WITH RENKO CHARTS. How to assemble all components to a full trading strategy. TIPS. 06 TRADING TIPS 06 PROFIT FROM GAP TRADING. PROFIT FROM GAP TRADING. A simple, but effective strategy. MORE KNOW-HOW AND VIDEOS HERE A simple, but effective strategy. MORE TRADING TIPS

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