Mechanical trading system based on Renko charts

The Renko charts are a type of price chart developed in Japan which only shows price movements; time and volume are not included. The Renko charts are constructed by placing a brick or box in the next column once the price exceeds the high or low of the previous brick by a predefined amount. The white boxes are used when the direction of the trend is up while the dark squares are used when the direction is bearish. This type of chart is quite effective for identifying support and resistance levels.
The trading signals occur when the direction of the trend changes and the bricks alternate colors.  The Renko charts work similar to Point & Figure charts, however they are easier to read and follow.
Renko charts
One of the hardest things with respect to trading (if not the most difficult) is to control one's emotions. There are countless books written about technical analysis and study of chart patterns, and of course these issues are important, but for most traders emotions are the most difficult thing to master. Mechanical systems which have specific entry and exit rules, as the system presented in this article, take the emotions out of the game and reduce the difficulties associated with emotions in trading.
Introduction to the trading system based on Renko charts
As indicated above, the Renko charts are quite effective to clearly define support and resistance levels and also ignored much of the "noise" that normally accompanies traditional price charts. However, Renko charts can also be subject to noise, and in order to mitigate this market noise, you can use a number of indicators to generate reliable buy and sell trading signals. 
A set of indicators that can be used are:
System rules 
The buy/sell signal occurs when there is a color change on the Renko chart signaling a possible change in the trend:
  • Buy signal: Bricks on Renko chart change color from dark to white (a possible change from bearish to bullish trend). 
  • Sell signal: Bricks on Renko chart change color from white to dark (a possible change from bullish to bearish trend).
In order to confirm and ensure the signals reliability (to eliminate the signals produced by market noise) we use the following filters:
  • EMA (7 periods): the price (Renko chart bricks) must be above (long position) or below (short position) of this moving average. By itself this is not a buy/sell signal but rather a guide, unless combined with other indicators. 
  • Stochastic Oscillator (14, 3, 3): This technical indicator used with this configuration works quite well through the crossings. The buy/sell signals generated with the Renko chart has to be confirmed with the stochastic oscillator as follows:
    • Buy signal: The stochastic has to cross the level 20 from below. 
    • Sell ​​Signal: The stochastic has to cross the level 80 from above. 
  • Parabolic SAR: The buy/sell signals from the Renko chart must match the Parabolic SAR signals for greater reliability.
    • Buy signal: The Parabolic SAR should be below the price, indicating that the market has an upward trend. 
    • Sell signal: The Parabolic SAR should be above the price, indicating that the market is bearish.
An MACD histogram with a 5-period EMA can be used to find price divergences, which can also generate good buy/sell signals.
If we put all these rules together, we have that the buy/sell signals from the Renko chart are confirmed by matching signals of the Parabolic SAR, crosses of levels 20 and 80 of the stochastic oscillator and the bullish/bearish cross of the EMA 7 with the price. This combination eliminates many of the false signals.
Trading systems based on Renko charts as the one presented above are good to get most of a trend while limiting losses which are kept to a minimum. Like any system sometimes it produces false signals, but these signals are more than compensated when we capture a strong trend.
Example of the System

In the chart above we see several trading signals generated by this system, which are indicated by blue arrows. First, we see the trend change indicated by the change of color in the Renko chart bricks. These initial signs are confirmed by the Parabolic SAR, the stochastic oscillator and the EMA (7 periods), which gives them validity. 
In this case, all signals generated profitable positions that produce profits for the trader. However, do not be fooled by this example, because like all trading system it can also produce false signals. In fact, in trading ranges that do not present a clear bullish or bearish trend, this strategy does not generate good profits. For this reason, it is recommended to respect all the filters described above to reduce the possibility of loss.

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