Range Bars vs Renko Charts
Forex trading with the help of candlestick, line and bar charts that are time based is fairly common. While all these charts are drawn on an hourly, daily, weekly and even monthly basis, an attractive alternative is available in the form of Range and Renko bars, which are independent of time and focus on price alone. The unique views they provide give greater insight into the market price action. These two types of bars are, however, quite different from each other. Here’s a look at their individual features and differences.
Developed by a Brazilian trader, Vincente Nicolelis, in 1995, to find a solution to the extreme volatility in the Brazilian market, the Nicolelis Range Bars are gaining popularity today because traders can use them to interpret the volatility in the forex market, while placing well-timed orders. Some important features of a Range Bar are:
- The bar sizes or the range from high to low is the same for every bar. For instance, if the chosen range is ten pips, every bar will measure exactly ten pips from high to low. This makes the charts smoother and easier to understand.
- Each bar closes on the high or low of the bar, making it easier for traders to plan entry or exits. Trends, reversals and pullbacks are much more clearly visible on range charts, in comparison to time based charts.
- Traders can easily use stop orders to manage the risk associated with an order, since they have a better idea of where the bottom or top is.
- These bars also allow easy identification of formations and patterns, since they do away with the need to wait for a six-hour bar or a five-hour bar to close or to know that the price has formed a double tip or has retraced and is now resuming the original trend.
- Since the bars are independent of time, the time taken to complete each bar differs. This means a long period of volatile price action might get compressed into just a couple of range bars.
- All technical indicators work the same way on range bars as they do on time based charts.
- Range bars can have any number of bars during a trading session. While the number of bars printed will be higher during times of higher volatility, fewer bars will be printed during periods of lower volatility.
- The number of bars printed during a trading session also depends on the instrument being charted and the specified price movement of the range bar.
The three basic rules of Range Bars are:
- Each range bar must have a high/low range that equals the specified range
- Each range bar must open outside the high/low range of the previous bar, and
- Each range bar must close at either its high or its low.
Traders can set the range for a range bar in accordance with their trading durations. For example, short term traders may be interested in looking at short term price movements, and would then have a smaller range bar setting, while long term traders might require bar settings based on larger price moves.
Also purely dependent on price, Renko (which means brick in Japanese) bars are made according to a pre-decided range or size. For instance, if we choose a size of 3 pips for the EUR/USD pair, then for every 3-pip move in price, a new Renko brick is formed, without any consideration about the time. So, if the EUR/USD moves only 2 pips in day, a new brick will not be formed. This approach helps in showing price trends very clearly. These bars differ from Range bars in the following ways:
- In Renko bars, the price must travel two times the Renko bar in the opposite directions.
- They too help in identifying ranging price action, but flat or opposite bars may get printed if the ranging price action continues.
- As compared to Range bars, where the high and low levels are important, the closing prices are very important for studying Renko bars.
While Range and Renko bars reflect price action more clearly, there are several pitfalls associated with using them as a trading tool. First and foremost, the price movement reflected by a bar appears to be perfect but may not be true in reality, since the price may have moved around a lot before the bar was actually drawn. This means that traders who rely on these bars in small settings often lose out on trade opportunities because they can’t enter when the brick is drawn and may also lose on account of the spread.
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