Today we want show a powerful way to apply see inside the bar Footprint information to Renko bars. One of the primary uses of Renko bars is to identify new trends and help a trader extract more profit from that trend. Before we get into a few examples from this week's trading, let's first take a quick look at Renko bars and how they work.
Overview of Renko
Renko charts are thought to have acquired their name from the Japanese word for brick, "renga". In Renko charts, a box (or "brick" as they're called) is drawn in the direction of the prior move only if prices move by a minimum amount (i.e., the box size). The bricks are always equal in size. The box size is specified by the user, and can be any value greater than or equal to the tick increment of the symbol being charted (minimum of 0.25 for ES). Similar to Range Bars or Point & Figure charts, the frequency of Renko Bars is driven by price movement, not by time.
Traditional Renko Chart
Basic trend reversals are signaled with the emergence of a red or green renko box/brick.
A new green brick indicates the beginning of a new uptrend. A new red brick indicates the beginning of a new downtrend.
Since the Renko chart is a trend following technique, there are times when Renko charts produce whipsaws, giving signals near the end of short-lived trends. However, the expectation with a trend following technique is that it allows you to ride the major portion of significant trends. We want to show how the a Renko chart set to a Footprint can help you capture more profit from the trend.
Applying the Footprint to Renko
There are 2 very good rules of thumb to keep in mind when applying the Footprint to a Renko chart.
First, use the Footprint to confirm price and volume activity in trends. So if the Renko bricks are green, you should be seeing a positive delta or positive volume imbalance depending upon which Footprint chart type you are using.
Second, use the Footprint as a trigger to spot reversals. Markets will not trade in one direction forever. If you see a series of red bricks on a Renko, at some point a green Renko brick will appear. Use Footprints to look inside the bar and see if delta and order flow are turning as well.