Renko Bars and Range Bars

WARNING: This post is very long and has no pictures. If this alarms you skip down to the next post which has few words and shiny pictures of charts.

Pandu the FX trader from Australia asked me this on an old post.

"I want to know what do you mean by 'The hard stop value is set as a % of the range bar we are trading.'. What is the meaning of 'Range Bar'? Also, what parameters do you use for the ADX you use?"

So that along with all the google searches for renko bar trading I get on this blog I thought I should take a moment and discuss why I quit using range bars and or renko bars.

In a word, time.

We all have access to the same data, we all live in the same space and time continuum. I heard that on Star Trek I think.

I don't move the market. I want to be looking at what most everyone else is looking at. Why? Because I'm going to ride along with whomever, collectively or all by themselves, does move the market.

So we're all looking at price move and we are all breaking down that price action with different methods. We have volume, time, and tick data and all of it tracks the same price but presents the trader bar closes in different ways. I want to look at the chart picture with the method, time, that I think most other traders are using. Note I said think, not know.

Of course everyone who uses one of those categories thinks it is the best. Until they change, just like I have. :)

Back to Pandu's question. The range bar measures a set range of price movements and when that range is met the bar prints.

A renko bar does the same except the range has to be all in one direction for the bar to print. So with a 10 tick renko bar the range has to be all up or all down for it to print. A 10 tick range bar could open at 70.25 and have 5 ticks up to 70.30 and 5 ticks down to 70.20 and the bar would print. A 10 tick renko bar would have to have 10 ticks up to 70.35 or 10 ticks down to 70.15 before it would print.
There are other little nuances to them both depending on your chart service but I'm not going into that here.

Got it? I hope so it exhausted me explaining it.

So the benefits to both are when price moves quickly the bars start printing. We need the bars to print in order for our indicators to, well, indicate. It may be a shock for some but all our indicators are lagging. Sorry. They need the price bars to move in order for them to do their "magic".

This all sounds good and works for many people, like the man who loves rain (Rainwater) and really wants to be included in Jules private blog but is too shy to ask. (Rainwater uses range bars not renko bars)

Actually it sounds so good it's making me wonder why I gave them up?

Renko, I gave up because there can be too much intra bar movement and it is too hard to find your way in with renko alone. I started using time charts with renko and then eventually just dumped the renko. Renko charts are great for keeping you in a trade and could be used for a technical exit, but then I started trading for a target rather than a technical exit so renko went bye bye.

Range bars are probably of more use but I found they gave me too many false starts and I need to control my pushy the button fingers.

I control them with time.

Time, I have to wait. I use 1 and 2 minute bars so I don't wait for long but for me, let me say again, for me, I find that time works the best.

Am I late sometimes? Yes. I give that up in order to stay out of some false moves.

So there it is, my trading still looks at range via the ATR, I need to see some movement in one direction via the ADX, I need price on the right side of the EMA's, I look for a higher high or lower low and away we go.

The longer multiple EMAs are there to simulate what a longer term chart would be showing in terms of trend and direction. Like a 5 and 15 minute chart or so.

This is a very long post with no pictures which may be alarming to some. I better place a warning at the top of this post.

Oh yes the rest of Pandu's questions. My stop on the range or renko bar was a % of the bar I was using. So for a 20 tick range bar I may use 75% of that as a stop, 15 ticks. With the ADX and ATR I am looking for a minimum threshold to be met before I start looking for signals. That's all.

P.S. Those renko bar charts were sure pretty.

Home

The World Was Flat

I was complaining that soybeans had not offered much to trade in July. Looking at the daily chart for July you can see why. When the world is flat stay on the beach.

Daily Soybean Chart
Crude on the other hand has been anything but flat and the opportunities to trade intraday have been plentiful.

Daily Crude Oil Chart
The message is, listen carefully now the guru is speaking, trade the bumpy chart not the flat one.

I am Genius

Barrel count today.

I took a couple of trades before the inventory report and got 2 break evens. Then the report. Wow, I guess they found a few more barrels lying around and price fell off the map. I didn't take the last one as per my plan but it worked as well.

Nice day.

Beans seem awfully quiet this summer but I'm glad I look at both and take whichever is moving.

2 Minute Crude Oil Chart

2 Minute Crude Oil Chart

1 Minute Soybean Chart

Change

I did peek a little at charts while on holidays, which was a mistake, and found myself squinting at little charts on my laptop. This got me to thinking about getting the CL trading down to one chart instead of two.

I only use the one minute chart for soybeans but have found with crude oil I need to see trend and range on both the three and one minute charts in order to stay out of trouble. Besides having to watch two charts I have also found that when I see blue on one of the charts I want to hit the button rather than waiting for conformation from the second chart.

So being the quantitative genius that I am I added one minute to three minutes, divided by two and came up with a 2 minute chart.

Still playing with the ADX and ATR settings but found a couple of nice trades today. The trend was so strong this morning blind monkeys could have made money today. Only time will tell if the settings will keep me out of the flats and in the trends.

2 Minute Crude Oil Chart

Summer Repeat

This post seems to have hit home with a few people, few being more than one.

If The Lonely Trader liked it, it must be good. In fact it's so good people pass it off as their own.

So as this is the season for repeats here it is again.

Why you should not be a trader

Before I answer that statement let's have a look at why people want to be traders.

1) They can't sleep.
2) They just got fired.
3) They have never been hired.
4) They want to make lots of money.
5) They know a guy and he.......
6) They don't like their boss.
7) They don’t want to be "corporate".
8) They want to work when they feel like it.
9) They can do this work from the beach.
10) Women love traders.

Now let's have a look at what I think it takes to be a successful trader, or more precisely to become a successful trader.

1) A complete understanding and acceptance of risk management.

That's it?

Ok let me flesh that out a bit. I used to work as a lender in a bank. Banks have a department called risk management. The people that wind up there usually did not do so well in the sales (lending) side of the business. I wonder if they still call it sales? Never mind that's another topic.

Where were we? Oh yes risk managers, risk managers are generally men who are old, bald, ugly, have no friends, and don't do all that well in social situations. They are most comfortable in their 17th floor cubicle where they do not see any human life form other than their comrades.

What does this have to do with trading?

Nothing I just like making fun of risk managers.

No no no bear with me here. So I as the lender in the bank meet a client, the client tells me a very long story about why they need money for this great business idea they have. I fall for it hook line and sinker and spend the next 2 days writing up a credit request that I send to risk management.

Now the fun begins.

One of my "partners" in risk calls me up to "discuss" this proposal, they start out nicely enough as they have been taught to do after the Johnson incident. Then they forget all that partner crap and really start laying into me. Insufficient net worth, no current ratio, no experience, tough industry, won't withstand a cyclical downturn, debt service ratio too weak, why would I send this piece of crap down here and waste their time, how long have you been in this business you stupid moron.

All righty then.

Is there a point to all this?

There is, I have to stop crying first. Ok, I'm better now.

Let's get back to trading.

So I'm all set up, charts, broker, front end, Mark Douglas in hand, and now I see a "trade", WHAM I pull the trigger, SLAM hits my stop in 3 seconds, WHAM go again, I am a day trader and I am fast baby, SLAM hits my stop in 7 seconds, and on and on we go.

Now let’s add risk management. Remember all those annoying questions? How much capital do I have equals my position size. How many losing trades am I allowed to take? How many winning trades before I stop? What is that based on? What are my stops? When do I stop trading, daily stops, weekly stops, monthly stops, and on and on we go.

This is the reason why you should not be a trader. You are the risk management department. In banking the lender cannot be the risk manager or bad things happen. In our business the trader is the risk manager, and, bad things happen.

YOU MUST PRESERVE CAPITAL.

In my opinion that is the first and last thing all traders must think about. Not charts, not set ups, not what will I do with all my profit.

Capital preservation. It's not sexy, it's not fun, it's not exciting, and it has rules, rules that must be followed or you’re fired. In other words it's everything that you hated about your other job.

If you want a fun, exciting, and sexy job try on line poker.

If you want to be a trader/risk manager shave your head bald, insult all your friends until they leave, stop bathing, wear polyester, and sniff constantly.

There, you're ready to go.

Pretty and Ugly

I'm home.

I know that because I'm not looking at this anymore.



I'm looking at this.

1 Minute Soybean Chart

2 Minute Crude Oil Chart