The document discusses a mechanical trading system utilizing Renko charts, which display price movements without considering time or volume. It outlines the rules for generating buy/sell signals based on the color changes of Renko bricks, complemented by indicators like EMA, stochastic oscillator, and parabolic SAR to filter false signals. The system is recommended for trending markets and encourages money management techniques to mitigate potential losses.

1. Mechanical trading system
based on Renko charts
By Forexdominion.com

2. The Renko Charts
• The Renko charts are a type of price chart developed in Japan which only shows
price movements; time and volume are not included. The Renko charts are
constructed by placing a brick or box in the next column once the price exceeds the
high or low of the previous brick by a predefined amount.
• The trading signals are generated when the direction of the trend changes and the
bricks alternate colors.
• Trading systems based on Renko charts offer the possibility to get most of a trend
while limiting losses. In this systems, losses are kept to a minimum.

3. Example of Renko Charts

4. Introduction to the trading system
• Renko charts are quite effective to clearly define support and resistance levels and
also ignored much of the market "noise“. However, Renko charts also could have
noise.
• To filter the trading signals generated by Renko charts we can use the following
set of indicators:
• Exponential Moving Average (EMA) of 7 periods.
• Stochastic oscillator (14, 3, 3).
• Parabolic SAR (0.09, 0.2).
• MACD histogram with a 5-period EMA to find price divergences.

5. Trading system rules
The rules to open a new buy/sell position are the following:
• Buy signal: Bricks on Renko chart change color from dark to white.This is a
signal of a possible change from bearish to bullish trend.
• Sell signal: Bricks on Renko chart change color from white to dark.This is a
signal of a possible change from bullish to bearish trend.
To eliminate o eliminate many false trading signals generated by the Renko charts
in the next slide we present a series of filters based on technical indicators.

6. Trading system filters
• The price (Renko chart bricks) must be above (long position) or below(short
position) the EMA of 7 periods.
• The stochastic has to cross the level 20 from below (long positions).
• The stochastic has to cross the level 80 from above (short positions).
The trading signals from the Renko chart must match the Parabolic SAR signals.
• The Parabolic SAR should be below the price for buy signals.
• The Parabolic SAR should be above the price for sell signals.

7. Example of the trading
system
• indicated above.
In the following image we can see
various examples of trading signals
generated by this system. In this case,
we take into account just the signals
which all filters

8. Example description
• The trading signals are indicated by blue arrows
• In first place, a posible trend change is indicated by a change of color in the
Renko chart bricks.
• These trading signals are confirmed by the Parabolic SAR, EMA of 7 periods and
the stochastic oscillator.
• In this example, all trading signals produced profitable positions that generated
profits.
• However, as all trading strategies, this system can produce false signals.

9. Recommendations for this trading system
• This trading system produce better results in market trends.
• As in any trading system, the traders should use money management
techniques to protect their account during periods when there is a streak of
losing trades (drawdown).
• It is recommended to test the system with a demo account.

10. Source of information
• This trading system was extracted from:
http://www.forexdominion.com/
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