The most frequently asked question I field about Renko Charts is: what box size should I use? In this article I’ll explain why the only honest answer I can give is “it depends.”
But first, just to ensure this article will make sense, let me briefly explain how Renko charts work. Renko charts use a “flexible” candle or box size, which you determine when you load the indicator onto your charts.
As price moves up your designated number of pips, a new blue (bullish) candle will form. However, if a new candle opens (let’s say the Box size is 10 pips) and then price falls 20 pips, a new red (bearish) candle will close. This is because price must move 10 pips either above the last close or below the last opening in order for a new box to appear and close on your charts.
This is what makes Renko charting so attractive to so many traders…the lack of wicks and the lack of numerous candles that fail to go anywhere but which cause your various indicators to give off a mixed variety of Buy and Sell signals, none of which have any validity.
Understanding how Renko candles form and close then gives rise to our FAQ: which box size works best when trading the Renko charts?
As mentioned above, the only honest answer is “it depends” and what it depends upon is what kind of forex trader is using Renko charting.
Some traders are best suited to be long-term traders. They tend to focus on hourly or 4 hour charts and watch for new trends to develop, jumping in once said trend is spotted and hanging in as long as they can to bank a maximum number of pips.
These types of traders should use larger box settings, such as 25 or 30 pips. If price moves up 25 pips and forms a new box, it must move DOWN by 50 pips in order to open a new box in the opposite direction. If you are familiar with trading pairs like the EUR/USD or the GBP/USD, you realize that large price reversals such as these don’t take place all that often. Once a trend is established in one direction, that trend will normally continue for 100-200 pips. Using a large box setting like 25 or 30 will eliminate those counter signals you might get using a 1 hour or 4 hour chart (those signals that cause you to exit a trade early, before another big move in your direction).
Other traders are more attracted to scalping and the kind of quick profits you can make on a 5-20 pip move. By using a 3 or 4 pip box size setting, these traders are in prime position to see every mini-trend as it forms and are able to buy and sell numerous times in any given hour during the London and NY trading sessions, banking 5-20 pips in profit each time.
When I respond to the question “which box size should I use?” my response will always ask the trader to perform a little self-analysis and determine whether they are a long-term trader or a scalper. Once I know the answer to that question, I can give them a more specific answer than “it depends.”