The Renko Reversal Trading Strategy focuses on identifying potential trend reversals using Renko charts. By combining price action with Renko chart patterns, traders can spot key reversal points where the market changes direction. Renko charts help filter out market noise, making it easier to identify significant price movements and reversal signals. This strategy is ideal for trend reversal traders who want to capture larger price moves after a market trend exhausts itself.

Why the Renko Reversal Trading Strategy Works

• Noise Reduction: Renko charts eliminate smaller price fluctuations and highlight major trends, making it easier to spot reversal points with fewer false signals.
• Clear Trend Reversals: By focusing on price action and Renko brick changes, this strategy helps identify when price is losing momentum and may be poised for a reversal.
• Accurate Entry Points: The strategy relies on identifying key support and resistance levels, combined with price action patterns, to enter trades with higher confidence.
• Capturing Larger Moves: This strategy is designed to capture larger price moves that follow trend reversals, which can result in greater profit potential.

What are Renko Charts?

Renko charts are a type of chart used to filter out market noise and focus on price movements. A new Renko brick is created when the price moves by a predetermined amount (called the box size). Renko charts are independent of time and focus purely on price movement, making them ideal for identifying trends and significant price changes without being affected by minor fluctuations.

Since Renko charts only display the significant price moves, they are an excellent tool for spotting trend reversals when price momentum shifts.

How the Renko Reversal Trading Strategy Works

The Renko Reversal Trading Strategy uses Renko charts and price action patterns to identify when price is likely to reverse direction. Here’s how it works:

1. Identify the Trend on the Renko Chart

The first step in the Renko Reversal Trading Strategy is to identify the overall trend using the Renko chart. Renko charts make it easy to spot when price is in a clear trend or is about to reverse.

• Bullish Trend: A series of upward-moving Renko bricks (green/white) indicates that the market is in a bullish trend.
• Bearish Trend: A series of downward-moving Renko bricks (red/black) indicates that the market is in a bearish trend.
• Neutral Market: If the Renko chart shows small bricks in both directions, it suggests a neutral or consolidating market.

Once you’ve identified the overall trend, you can look for potential reversal signals at key support or resistance levels.

2. Spot Reversal Patterns on Renko Charts

Look for price action patterns and Renko brick changes that signal a potential trend reversal. Some common patterns to look for include:

• Bullish Reversal Patterns:
  • Bullish Engulfing Pattern: When a green Renko brick follows a red brick, it signals that buyers are taking control of the market.
  • Hammer Pattern: A long lower wick with a small body at the bottom of a downtrend suggests that sellers are losing momentum, and the market may reverse.
  • Double Bottom: A double bottom pattern at support levels suggests that the price has found strong demand, and a reversal is likely to occur.
• Bearish Reversal Patterns:
  • Bearish Engulfing Pattern: When a red Renko brick follows a green brick, it signals that sellers are taking control of the market.
  • Shooting Star Pattern: A long upper wick with a small body at the top of an uptrend suggests that buyers are losing momentum, and the market may reverse.
  • Double Top: A double top pattern at resistance levels indicates that the price is facing strong selling pressure, and a reversal is likely to happen.

3. Confirm Reversal with Support and Resistance Levels

Once a potential reversal pattern has formed on the Renko chart, confirm the reversal by looking at key support and resistance levels. Price is more likely to reverse at these levels due to the increased buying or selling pressure.

• Support Levels: If the market is in a downtrend, look for a reversal at a key support level, where price has previously bounced higher.
• Resistance Levels: If the market is in an uptrend, look for a reversal at a key resistance level, where price has previously stalled or reversed.

4. Set Entry, Stop-Loss, and Take-Profit Levels

After confirming the reversal signal, you can enter the trade with well-defined entry, stop-loss, and take-profit levels:

• Entry:
  • For Bullish Reversal: Enter a long position when the Renko chart shows a bullish reversal pattern (e.g., bullish engulfing or hammer), confirmed by a breakout above resistance or bounce off support.
  • For Bearish Reversal: Enter a short position when the Renko chart shows a bearish reversal pattern (e.g., bearish engulfing or shooting star), confirmed by a breakdown below support or rejection at resistance.
• Stop-Loss:
  • For long trades, place the stop-loss below the most recent swing low or support level.
  • For short trades, place the stop-loss above the most recent swing high or resistance level.
• Take-Profit:
  • For long trades, set the take-profit at the next resistance level or use a 1:2 risk-to-reward ratio.
  • For short trades, set the take-profit at the next support level or use a 1:2 risk-to-reward ratio.

5. Risk Management and Trade Management

• Risk-to-Reward Ratio: Aim for a minimum 1:2 risk-to-reward ratio to ensure the potential reward justifies the risk taken on each trade.
• Position Sizing: Use proper position sizing to ensure that no more than 1-2% of your total capital is at risk on any single trade.
• Trailing Stop: Once the price moves in your favour, consider using a trailing stop to lock in profits while allowing the price to continue in the direction of the trend.
• Partial Profit-Taking: Consider taking partial profits at key support or resistance levels, or when the price shows signs of a reversal.

Strategy Summary Table

Component	Details
Timeframe	Renko chart (based on price movement, not time)
Indicators	Price action patterns, support/resistance levels
Entry Trigger	Reversal patterns confirmed by support/resistance levels
Stop-Loss	Below/above recent swing low/high or key support/resistance
Take-Profit	Next support/resistance, 1:2 risk-to-reward ratio
Best Use Case	Forex, stocks, commodities during market reversals

Example: Bullish Renko Reversal Strategy on EUR/USD

1. Step 1: Identify the Trend with Renko Charts:
   • EUR/USD is in a downtrend, confirmed by downward-moving Renko bricks. The price is approaching a key support level at 1.1750.
2. Step 2: Confirm the Reversal:
   • A bullish engulfing pattern forms at the 1.1750 support level, confirming a potential trend reversal.
3. Step 3: Set Stop-Loss and Take-Profit:
   • Stop-loss is placed below 1.1700 (recent swing low).
   • Take-profit is set at 1.1850 (next resistance level).
4. Step 4: Exit the Trade:
   • The price moves up to 1.1850, hitting the resistance level, and the trader exits with a 2R profit.

Conclusion: Capture Trend Reversals with the Renko Reversal Strategy

The Renko Reversal Trading Strategy is a powerful method for identifying and capturing trend reversals using Renko charts and price action patterns. By focusing on significant price movements and using key support and resistance levels, traders can improve their chances of entering successful trades at optimal reversal points.

To learn more about how to implement the Renko Reversal Strategy, enrol in our Trading Courses at Traders MBA and start capturing trend reversals with confidence.