What are the important elements in developing a Renko trading system? We first have to find out what a good trading system is composed of. We can then use this information to assist us in developing a Renko forex trading strategy.
There are five important elements in a solid trading approach. These 5 elements are:
1. Accuracy
2. Reward to Risk Ratio (Reward/Risk)
3. Expectancy
4. Position Size
5. Account Equity
The percentage of times we win is known as accuracy. If we placed 10 wagers and won 7 wagers, our accuracy is 70%.
The comparison of the relative size of your winning bets compared to your losing bets is known as the Reward to Risk Ratio.
If we risk $30 to make $60, our reward is $60. Therefore our Reward to Risk Ratio is $60/$30 or simply a 2 to 1 Reward/Risk Ratio. A trading method which risks $100 to earn $50 on a winning trade has a $50/$100 or 1 to 2 Reward/Risk Ratio.
Expectancy represents how often you are able to place a trade, or opportunity. If you place 10 wagers per month with your system, your annual expectancy is 120.
But if your system allows you to enter 5 wagers per day x 20 trading days per month x 12 months per year then your annual expectancy is 5 x 20 x 12 = 1,200.
Position Sizing represents money management. How "big" is our risk? It tells you how many units to risk per wager. The majority of traders use a fixed % of equity risk per wager.
The size of your account or account balance refers to your account equity. The previous 4 elements must take into consideration your account balance. A good fx strategy will incorporate all 5 of these essential components.
How do we use these 5 variables to develop a Renko trading system? This is what I suggest;
Almost every trader I have met wishes for 100% accuracy. But let's be realistic here OK? I think too many market participants focus on just this variable. They continue to search for the "holy grail" system to improve their accuracy.
For our example let's just assume we win 7 out of every 10 trades, or 70% accuracy.
Let's use a simple and boring 1 to 1 Reward to Risk Ratio while we develop our Renko trading system. If we risk $50, our winners will be $50.
We will start with a $5,000 account size and risk 1% per trade. We will trade 5 days per week and place 2 trades each day. This is equal to 40 trades per month. Our Account Equity is $5,000 and our Position Size has been defined as 1% risk per trade. Our opportunity, or expectancy to trade, is 40 trades per month.
We want to place 2 trades per day. I know I can place 2 trades per day scalping or swing trading. This would probably take 1 hour of our time each day. I will start by looking at Renko charts with smaller Renko bars such as 5 pip or 10 pip Renko bars.
I want to risk 3 to 5 Renko bars to gain 3 to 5 Renko bars. Remember our 1 to 1 Reward to Risk Ratio?
Let's do the math together:
1% Risk per Trade = 1% x $5,000 Account Equity = $50 Risk Per Trade. The Reward is also $50.
If we risk 2 trades per day x 5 days per week x 4 weeks per month = we have a total of 40 trades. A 60% accuracy x 40 trades produces 24 winning trades and 16 losing trades.
24 winning trades x $100 Reward = $2,400 winning trades. 16 losing trades is -$1,600.
$2,400 + (-$1,600) = +800.
This is how you use the 5 key elements to a good trading system and apply it to developing a Renko trading system.
Tom Grennell is an avid forex trader and enthusiast. He shares his passion for this industry via his detailed writings and recommendations.
His favorite Renko Trading System for Forex can be investigated further at Forex Renko Charts
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