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Renko Grids

Overview:

Grid trading is a type of strategy that involves buying and selling at predetermined price levels within a grid system. A grid comprises a series of horizontal lines that represent price levels. The objective of grid trading is to profit from price fluctuations that occur within a specific price range.

Inspired by Renko charts:

The Renko chart is unique in that it only considers price movements and ignores time intervals. This means that each Renko 'brick' represents a certain price movement, regardless of the time it took to make that movement. A brick can either be fixed, or ATR-based.
In this indicator, some key modifications to the traditional Renko chart are:
  • We will consider time intervals. [This will be illustrated in Figure 1, the next image]
  • We will ignore the highs and lows. The body of the Renko brick will be considered as the lower and upper bounds of trading ranges.
When plotting Renko bricks in a time series chart, the bricks can be visualized as periods of horizontal ranges. It looks something like this:
Figure 1: When the price makes 1x the brick size in the prevailing trend direction, then the trend is considered to be 'continuing'. Conversely, if the price makes a counter move by 2x the brick size, then is a 'potential reversal' (but be careful, it can also be a huge move of what appears to be a reversal, but it's actually a pullback when zoomed out and viewed from a higher timeframe).

Advantages of this method:

  • The underlying method for calculating 'bricks' (ie. 1x movement for trend continuation, and 2x movement for potential reversal) will reduce a lot of unwanted noise. To simplify the user experience, just pay attention to the color of the bricks.
  • It's a good method for adding to winning positions. A trend follower might consider adding to the existing position if the price has moved towards a new key level provided that he or she believes momentum will continue.

Disadvantages of this method:

  • Price levels can be arbitrary since price is a dependent variable that is affected by the value of the first data point used in calculations. Unlike most indicators that use rolling windows and drop older data points (e.g., SMA20 where the 21st data point is dropped off), this method treats the prior upper or lower bound as values carried forward. As a result, the method's outcomes may vary depending on the market data provider used.

Applications:

This is a trend-following strategy:
  • Buy when (a) the brick is bullish, and confirmed by (b) when the price is closing above SMA at a length of the trader's choice; and
  • Sell when (a) the brick is bearish, and confirmed by (b) when the price is closing below SMA at a length of the trader's choice
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