The Daily Reckoning UK

An Intro To Range Bars And Renko Bars

Max Munroe

by

Posted 15th November 2013

Keep the questions coming in, guys. If you want us to write about something, we’ll do our best to cover it.

One reader asked: “Can you tell me the difference between range bars and renko bricks?”

So let’s look at that. I’ll start by looking at the differences. And then I figured you might find it useful if I give you a few ideas and pit falls to watch out for.

Sound OK? Let’s take a look – and be sure to leave a comment at the end if you have any questions or points to make about these guys.

Forget about time with these bars

The first thing to say is that both Renko (which means ‘brick’ in Japanese) and range bars are focused solely on price and not time. The main difference is in how the bars are formed.

Bricks or bars? Let’s call them all bars from now on…

A Renko bar is only formed once price has moved the bar’s set distance in one direction or another. You choose how many pips make up a bar. For example, you might have Renko bars with a setting of 10 pips.

In this example, a new bar will only be drawn if price moves 10 pips in one direction

What this means is that price could move 9 pips in one direction, reverse then move 10 pips in the other direction and only one bar would be drawn.

So how about range bars?

Well, a range bar with the same setting of 10 pips will actually draw if the 10-pip range is met in either direction.

In the case above, it would draw the 9 pips in one direction and 1 pip in the opposite direction making a very distinct pin bar.

The charts below show the difference between Renko and range bars:

renko-bars-e1435835726232

range-bars-e1435835754576

But the key with both Renko and range bars is that they ignore time.

That is they only draw when their criteria are hit. That could be in the course of 5 seconds or 5 hours.

Now a lot of people trade these types of bars because on very small settings they look as if they can make perfect strategies for trading. However, there are actually a lot of pitfalls to be careful with.

Pitfalls to watch out for

The first is one I have touched on above.

If we took a 5-pip setting on both of these bars, 5 pips could be made in split seconds. This makes it extremely difficult to trade even for a fully automated system.

The next pitfall specifically to Renko bars is that it is easy to see how price could shop around a lot before the bar is actually drawn.

The final real pitfall, a killer for a lot of automated strategies and systems people develop with Renko and range bars, is that these bars don’t represent actual price movements.

I need to explain this in a bit more detail using Renko as an example, as it is slightly worse than range for this issue.

Assuming price moved up or down by 10 pips, the bar will be drawn on a Renko chart.

However, that does not mean that price moved fluidly during the drawing of the bar and in fact price can easily jump. But the bar would make this look like perfect price movement.

This means people who try to trade Renko and range bars on tiny settings often lose on the trade because they can’t get in when the brick is drawn and they also lose on the spread.

If your bar size is 5 pips and your spread is 2.5 pips, then half the bar is already gone in spread.

I actually get a lot of these automated or manual strategies sent to me that look like they have perfect equity and yield curves. But unfortunately they just don’t work as the individual hasn’t considered so many of these points.

But what’s really interesting to me is that they cut out the noise in trading.

If you can use some good settings for the currency pair you are working on, you can just see the key trends.

This then lends itself to some interesting strategies.

For instance, take a look at using moving averages, Stochastics or MACD on these types of bar.

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You’ll find that Renko and range bars give a very different view on some simple trading strategies. Just remember the difficulties in trading these bars on scales that are too small.

One thing I would encourage is looking at range bars with the Ichimoku cloud trading I talked about recently, these together can work extremely well.

I will touch on these a bit more as you can actually build some interesting systems off them.

It’s just that they do require a bit of work, so I wanted to introduce you to them first. Have a look at them on your trading platform so when they come up next time you will be familiar with them.

Leave your thoughts and experiences with Renko and range bars below.

Bye for now,

Max Munroe

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