This is a guest post by Ranga of Renkotraders.com.
Just under a few years ago, stock investing to me was all about picking a random chart, throwing in some indicators and determining where to buy and where to sell. Needless to say, this exercise in technical analysis was a hit and miss in most cases. One of the most important aspects when trading stocks is in understanding the complete landscape of the stock that you want to trade.
Thus, even if the short term technicals tell you to buy, without know what the fundamentals are like, it can be akin to driving in the blind with no headlights on.
A few false calls on this approach to trading soon pushed me into paying attention to the fundamentals. Obviously, I am now a lot more cautious when for example I come across a stock where the technical show strong bullishness but the stock’s earnings release is just a day or two away and the overall picture isn’t that rosy.
Within the stock trading community, there are two types of traders or investors that I come across. Investors are often the ones who aren’t really bothered with the day to day price movement, and traders most often are. This article caters to the stock traders, the ones who are not day traders, but at the same time do not see themselves holding on to a stock for no more than a year or two.
Having done my fair bit of investing, I can perhaps safely say that the most important aspect of stock trading is when you actually initiate the trade. Price can waver around a bit before taking off. But that’s the best case scenario. There are times when price starts to dip lower and lower, at one point putting to question your fundamental analysis as well as your technical analysis.
This article deals with such traders who face similar problems. You are good in your fundamental analysis, but not so good when it comes to picking a good entry price. Here are three reasons how using renko charting can help improve your trades.
Renko Charts Can Show You Trends Very Clearly.
In trading circles, it is often said that trends occur 20% of the time. The markets tend to remain range bound or head nowhere 80% of the time. Thus, it only highlights the case that a successful trader is one who can enter a trade right before this 20% trend begins. But the question is how does one determine the trend? It is just based on higher highs and higher lows?
The Walt Disney Char (DIS) shows a comparison of the Renko chart and the conventional candlestick chart. Notice the clear trend that was evident when you look to the left side of the chart. The candlestick chart too, does a fairly good job on showing this clean trend.
But notice how the market turns flat after the red vertical line. For the normal untrained eye, the dips might have been a price level to enter into the trend, but again, this brings us back to the previous point. Adding to long positions here would mean wait for long periods of time until the market tends to start trending again.
While the candlestick chart doesn’t quite show this, the Renko chart shows the flat zig-zag price movement. Between the two charts, the Renko chart would have clearly given you enough reasons to wait for this sideways range to break before you would consider taking a long position in the market.
Chart Patterns are a Lot Easier to Trade.
Whether you like it or not, technical chart patterns tell the market sentiment. The head and shoulders pattern, the bullish flags and pennants and so on are not just figment of one’s imagination, but in fact they are formed when investors tend to exhibit certain sentiment in the market. A head and shoulders pattern is often found at the top end of the rally, indicating that traders have pushed the price high enough to book profits. The resulting decline or a correction in the price trend, is thus not because of the head and shoulders but a result of the trader and investor behavior.
When Renko charts, chart patterns are easy to spot and removes quite a bit of subjectivity involved. So whether you prefer the simpler tops and bottoms patterns or the more complex trend line break outs, Renko charts can make it simple.
For the average stock trader, combining the information from their fundamental analysis alongside the technical chart patterns can result in a great market knowledge that most tend to miss out on. So the next time you want to buy a stock because it is rallying, it’s time to switch to Renko charts and figure out the real story.
Know Which Point of the Market You Are in.
Buying stocks, especially ones that are components of the Dow Jones or the S&P500 requires the trader to also look at how the larger market is performing. Fundamentals aside, sour market sentiment can lead to investors shunning stocks even in ones that are backed up by good fundamentals.
Renko charts can help stock traders to look at what stage the market is at, by analyzing the S&P500 renko chart. The chart below shows the peaks and troughs in the index. This information, which shows the trends clearly can be a great way to signal to traders looking at some specific stocks on whether it is a right time to enter a position or not.
When it comes to trade, investors and traders alike are often seen looking for information or tools that can give them an edge. Trading is all about timing, trading the right stock at the right price and at the right time. With Renko charts, the trends and all other technical information is available easily for traders who can spend time to research into these custom chart types.
So the next time you are left wondering if it is the right price to buy a stock, take a moment and switch to Renko charts. Chances are that you will find your answers there.
About the Author
Ranga is a Renko chart enthusiast and has been writing about Renko charting techniques on his blog, Renkotraders.com. For traders who are interested in this unique charting technique, Ranga offers a host of free and informative resources which will help you to get acquainted with Renko charting and also introduce you to various trading strategies based on Renko charts.
Click the link to return to Finance Footing home.