The Renko RSI Divergence Strategy combines the power of Renko charts with RSI divergence to identify potential trend reversals or continuations in the market. This strategy relies on the use of Renko charts to filter out market noise, making it easier to spot the broader trend, while RSI divergence helps pinpoint shifts in momentum that could signal a change in price direction.

Why the Renko RSI Divergence Strategy Works

• Noise Reduction: Renko charts remove smaller price fluctuations, allowing traders to focus on the more significant movements and trends in the market.
• Divergence Signals: RSI divergence is a powerful tool for spotting potential reversals or trend changes, and when combined with Renko charts, it increases the accuracy of the signals.
• Momentum Confirmation: Divergence between RSI and price action can indicate a weakening of momentum, helping traders make informed decisions about potential trend changes.
• Clear Trend Identification: Renko charts provide a clear view of the trend direction, helping traders avoid entering against the dominant market trend.

What is Renko Chart?

Renko charts are a type of price chart that focuses on price movement rather than time. Each “brick” or “box” on a Renko chart represents a fixed price movement (known as the box size), and a new brick is created only when the price moves the specified amount. This feature makes Renko charts ideal for identifying trends and price patterns without being distracted by short-term price fluctuations.

What is RSI Divergence?

RSI Divergence occurs when the price makes a new high or low, but the Relative Strength Index (RSI) fails to follow suit. Divergence is a key indicator of momentum shifts and can signal potential trend reversals.

• Bullish Divergence: Occurs when the price makes a lower low, but the RSI makes a higher low. This suggests that the downward momentum is weakening, and a potential bullish reversal is imminent.
• Bearish Divergence: Occurs when the price makes a higher high, but the RSI makes a lower high. This suggests that the upward momentum is weakening, and a potential bearish reversal is imminent.

How the Renko RSI Divergence Strategy Works

The strategy combines Renko charts for trend direction and RSI divergence for momentum confirmation. By identifying divergence on the RSI and confirming the trend with Renko charts, traders can enter high-probability trades with a solid understanding of both the price action and the underlying momentum.

1. Identify the Trend on the Renko Chart

Start by using the Renko chart to identify the overall trend. Renko charts are excellent at removing market noise, making it easier to spot trends. Look for the following:

• Bullish Trend: A series of green or white bricks that are consistently forming upwards.
• Bearish Trend: A series of red or black bricks that are consistently forming downwards.
• Neutral Market: If the Renko bricks are moving in both directions with no clear trend, it indicates a neutral market, where consolidation or indecision is present.

2. Look for Divergence on the RSI

Next, apply the RSI (Relative Strength Index) to the price chart. RSI divergence is a key signal in this strategy:

• Bullish Divergence: Look for a lower low in the price but a higher low in the RSI. This suggests weakening downward momentum and a potential bullish reversal.
• Bearish Divergence: Look for a higher high in the price but a lower high in the RSI. This suggests weakening upward momentum and a potential bearish reversal.

RSI Settings: Use the standard 14-period RSI, which is commonly used to identify overbought and oversold conditions. In the case of divergence, we look at price action and RSI levels together.

3. Confirm Divergence with the Renko Trend

The divergence on the RSI must align with the Renko chart trend. For example:

• For Bullish Divergence: Ensure that the Renko chart is in an uptrend, confirmed by green/white bricks. The RSI should show a higher low even though the price is making a lower low, indicating weakening bearish momentum.
• For Bearish Divergence: Ensure that the Renko chart is in a downtrend, confirmed by red/black bricks. The RSI should show a lower high even though the price is making a higher high, indicating weakening bullish momentum.

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

Once the RSI divergence is confirmed and the Renko chart trend is aligned, set your entry, stop-loss, and take-profit levels.

• Entry:
  • For Bullish Divergence: Enter a long position after confirming the bullish divergence and when the price starts to move higher from the support level or trendline. Look for a breakout above a previous high.
  • For Bearish Divergence: Enter a short position after confirming the bearish divergence and when the price starts to move lower from the resistance level or trendline. Look for a breakdown below a previous low.
• Stop-Loss:
  • For long trades, place your stop-loss just below the recent swing low or support level on the Renko chart.
  • For short trades, place your stop-loss just above the recent swing high or resistance level on the Renko chart.
• Take-Profit:
  • For long trades, set your take-profit at the next resistance level or use Fibonacci extensions to project potential price targets.
  • For short trades, set your take-profit at the next support level or use Fibonacci extensions for downside targets.

5. Risk Management and Trade Management

• Risk-to-Reward Ratio: Always aim for a minimum 1:2 risk-to-reward ratio to ensure that your potential reward justifies the risk you are taking 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 each trade.
• Trailing Stop: Once the trade moves in your favour, use 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 as the price reaches key support or resistance levels.

Strategy Summary Table

Component	Details
Timeframe	Renko chart (based on price movement, not time)
Indicators	RSI (14-period) for divergence confirmation
Entry Trigger	RSI divergence confirmed by Renko trend (bullish or bearish)
Stop-Loss	Below/above recent swing low/high or key support/resistance
Take-Profit	Next support/resistance, Fibonacci extensions
Best Use Case	Forex, stocks, commodities during strong trends

Example: Bullish Renko RSI Divergence Strategy on EUR/USD

1. Step 1: Identify the Trend with Renko Charts:
   • EUR/USD is in a bullish trend, confirmed by upward-moving Renko bricks.
2. Step 2: Look for Divergence on RSI:
   • On the RSI, price forms a lower low, but the RSI forms a higher low, indicating bullish divergence.
3. Step 3: Confirm Entry:
   • The price breaks above the previous resistance at 1.1800, confirming the trend continuation. Enter a long position.
4. Step 4: Set Stop-Loss and Take-Profit:
   • Stop-loss is placed below 1.1750 (recent swing low).
   • Take-profit is set at 1.1900 (next resistance level).
5. Step 5: Exit the Trade:
   • The price moves up to 1.1900, and the trader exits with a 2.5R profit.

Conclusion: Maximise Trend Reversals with the Renko RSI Divergence Strategy

The Renko RSI Divergence Strategy is an effective tool for traders looking to identify trend reversals or continuations using Renko charts and RSI divergence. This combination allows traders to enter high-probability trades based on momentum shifts, offering a clearer picture of market dynamics and better trade timing.

To learn more about how to implement the Renko RSI Divergence Strategy in your trading, enrol in our Trading Courses at Traders MBA and start refining your trading approach for greater success.