Part 7: Some Examples of Analysis with Indicators
First, let’s look at some of the key indicators that are included in the charts. Regardless of the brick size (10,25, or 50), all charts will have the same configuration.
In terms of support and resistance, Renko bricks make it easier to spot these levels as they smooth out minor price fluctuations. Support and resistance would be identified by areas where the price has repeatedly reversed direction.
When comparing the 12 and 20-period DEMA to the Renko bricks, look for areas where the DEMAs act as dynamic support or resistance to the price action indicated by the bricks. Similarly, the 20-period SMA and the 9-period WMA would be assessed for their interaction with the Renko bricks.
For breakout patterns, we would look for a consolidation of Renko bricks, indicated by a tight clustering of bricks without clear direction, followed by a breakout above or below this consolidation with a corresponding move in the moving averages.
Let’s identify any notable patterns or signals on the chart. We will look for:
The Average Directional Index (ADX) is used to determine the strength of a trend. The value of 35 that is used is higher than the standard 20 or 25, which implies the reduced noise in Renko charts.
Here’s how you might interpret the ADX in conjunction with the DI lines:
To apply this to your Renko chart, you would look for periods where the ADX dips below 35 and pay attention to its direction relative to the DI lines. You'd also consider the brick color change on the Renko chart for confirmation of trend direction if the ADX starts to rise after the dip.
Keep in mind that technical indicators should not be used in isolation; they are more effective when used in conjunction with other analysis tools and techniques. Renko charts themselves filter out smaller price movements, so the ADX on a Renko chart might not react the same way as it would on a traditional candlestick chart.
Here's some ideas on how to analyze and correlate the given indicators to price action:
When analyzing the chart, consider the following correlations and insights:
For trade setups, you might consider the following:
It's crucial to back test these indicators and their correlations with historical price data to validate their predictive power. Additionally, always manage risk appropriately, as indicators are not foolproof and should be used in conjunction with other forms of analysis and sound trading principles.
Part 8: Working Through Some Examples
to-follow
First, let’s look at some of the key indicators that are included in the charts. Regardless of the brick size (10,25, or 50), all charts will have the same configuration.
- DEMA (12-period and 20-period): These moving averages are designed to react more quickly to price changes than a traditional simple moving average (SMA). The 12-period DEMA is black, and the 20-period DEMA is red. We would look for the 12-period DEMA to cross above the 20-period as a potential bullish signal and below as a bearish signal. As you examine the charts going forward, pay close attention to these two when comparing them to the dynamics of the brick patterns.
- SMA (20-period) with Blue Dots: This moving average is plotted with blue dots and provides a visual indication of the longer-term trend. It's smoother and slower to react to price changes compared to the DEMA.
- WMA (9-period) on the 20-period SMA (Purple Line): The WMA is used to confirm trends and reversals. When the WMA is above the SMA, it may indicate an uptrend, and vice versa for a downtrend.
In terms of support and resistance, Renko bricks make it easier to spot these levels as they smooth out minor price fluctuations. Support and resistance would be identified by areas where the price has repeatedly reversed direction.
When comparing the 12 and 20-period DEMA to the Renko bricks, look for areas where the DEMAs act as dynamic support or resistance to the price action indicated by the bricks. Similarly, the 20-period SMA and the 9-period WMA would be assessed for their interaction with the Renko bricks.
For breakout patterns, we would look for a consolidation of Renko bricks, indicated by a tight clustering of bricks without clear direction, followed by a breakout above or below this consolidation with a corresponding move in the moving averages.
Let’s identify any notable patterns or signals on the chart. We will look for:
- Crossovers between the DEMAs
- The relationship between the DEMAs and the Renko bricks
- Potential support and resistance levels
- Any consolidation patterns that might indicate breakout points
The Average Directional Index (ADX) is used to determine the strength of a trend. The value of 35 that is used is higher than the standard 20 or 25, which implies the reduced noise in Renko charts.
Here’s how you might interpret the ADX in conjunction with the DI lines:
- Consolidation: If the ADX is dropping and has crossed below the 35 level, it may indicate that the trend strength is weakening, suggesting a period of consolidation or range-bound market.
- ADX Below DI Lines: When the ADX drops below both the +DI (positive directional indicator) and -DI (negative directional indicator), it further suggests that neither buyers nor sellers are in control, reinforcing the consolidation signal.
- Watching for a Trend Change: If after dropping, the ADX starts to turn upward while below the DI lines, it could be an early sign that a new trend is starting to form. The direction of the trend would be indicated by which DI line the ADX crosses. If it crosses the +DI, it may signal the start of an uptrend; if it crosses the -DI, a downtrend might be beginning.
To apply this to your Renko chart, you would look for periods where the ADX dips below 35 and pay attention to its direction relative to the DI lines. You'd also consider the brick color change on the Renko chart for confirmation of trend direction if the ADX starts to rise after the dip.
Keep in mind that technical indicators should not be used in isolation; they are more effective when used in conjunction with other analysis tools and techniques. Renko charts themselves filter out smaller price movements, so the ADX on a Renko chart might not react the same way as it would on a traditional candlestick chart.
Here's some ideas on how to analyze and correlate the given indicators to price action:
- Renko Bricks: Renko charts focus on price changes that meet a minimum amount and filter out minor price movements, thus highlighting the trend over time. A 50-tick Renko chart will only print a new brick when the price moves by 50 ticks, thereby smoothing out minor fluctuations and making trends easier to spot. The 1-hour timeframe means that each brick represents an hour's worth of price movement.
- Linear Regression Channel (1st and 2nd degree): This tool is used to identify potential support and resistance levels and the overall trend direction. The 1st degree (linear) regression trendlines show the mean price movement, while the 2nd degree could show a parabolic trend which accounts for acceleration in price movement. The price often oscillates around the mean trendline, and deviations can be used to identify overbought or oversold conditions.
- Double Exponential Moving Average (DEMA) 12 and 20: The DEMA is a faster-moving average that reduces lag time compared to traditional moving averages. In your setup, the DEMA 12 would be more reactive to price changes, potentially serving as a short-term trend indicator, while the DEMA 20 could be used to confirm medium-term trends.
- Simple Moving Average (SMA) 20 with 9 period Weighted Moving Average (WMA): The SMA 20 is a common indicator for medium-term trend direction. When combined with the 9-period WMA, which gives more weight to recent prices, you could use crossovers between the two as potential buy/sell signals.
- Stochastic Oscillators (5,3,3 and 50,3,3): Stochastic oscillators compare the closing price of a commodity to its price range over a certain period. The 5,3,3 stochastic is a fast indicator that can signal short-term overbought or oversold conditions. The 50,3,3 stochastic, being much slower, could be used to assess the longer-term momentum of the market.
- Average Directional Index (ADX) with the Directional Movement Index (DMI): The ADX is used to measure the strength of a trend, whether up or down. The DMI includes both the Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI), which help determine the trend direction. A rising ADX indicates a strong trend, while a falling ADX suggests a weakening trend.
When analyzing the chart, consider the following correlations and insights:
- Renko and Regression Channel: Look for periods when the Renko bricks consistently stay on one side of the mean regression line. This could indicate a strong trend. If the price breaks through the regression channel, it might signal a potential reversal or a breakout.
- DEMA, SMA, and WMA: Watch for crossovers between these moving averages. A crossover of the DEMA 12 above the SMA 20 and WMA might indicate a bullish short-term momentum, while a crossover below could signal bearish momentum.
- Stochastic Oscillators: Look for divergence between the price and the stochastic oscillators. If the price makes new highs/lows but the stochastic does not confirm (known as a divergence), it could indicate a weakening trend.
- ADX and DMI: If the ADX is rising and the +DI is above the -DI, the uptrend is strong; if the -DI is above the +DI, the downtrend is strong. If the ADX is falling, the trend is considered weak or the market may be ranging.
For trade setups, you might consider the following:
- Long Entry: A new Renko brick in the direction of the trend, a bullish crossover in moving averages, the stochastic coming out of oversold territory, and a rising ADX with +DI above -DI.
- Short Entry: A new Renko brick opposite the trend direction, a bearish crossover in moving averages, the stochastic coming out of overbought territory, and a rising ADX with -DI above +DI.
It's crucial to back test these indicators and their correlations with historical price data to validate their predictive power. Additionally, always manage risk appropriately, as indicators are not foolproof and should be used in conjunction with other forms of analysis and sound trading principles.
Part 8: Working Through Some Examples
to-follow
