Submitted by Gold Stock Prophet Blog

A few weeks ago, Stockcharts.com introduced Renko charts, and, since that time, I have really developed an appreciation for this charting style. Renko charts, like candle charts, are a Japanese charting style. Renko charts differ in that they do not factor in the passage of time, and, thus, only use price in their construction.

I feel that Renko charts can be used very effectively to determine trends. The chart below is a monthly Renko chart of the Canadian financial sector and goes back three and a half years:

Outlined in the chart above is a buy and sell system that I am using in my own trading. The system has the following rules:

• Buy signals are generated when the price is in a column of 4 white bricks or more and above the moving average line.
• Buy signals are removed when your long position moves against you by 4 bricks
• Sell signals are generated when the price is in a column of 4 dark bricks or more and below the moving average line
• Sell signals are removed when the short position moves 4 bricks against you

By following these simple rules, the areas shaded yellow you would be long, the areas shaded in orange you would be short, and the area where there is no shading you would be neither long or short.

Although these rules are simple, they allow a trader to gain an edge in that they will allow you to:

• Buy strength in bull markets
• Short sell weakness in bear markets
• Avoid getting involved with weak counter-trend moves (like what we have now in financials)
• Cut losses short
• Let winners run
• Separate emotions from decision making
• Avoid hours of analysis or try to predict the future

I sense that most traders are hesitant to following such a simple plan, as it is sometimes felt that making money in the market surely must involve more than this. However, after spending thousands of dollars on books, and years of research, there is no question in my mind that any trading method must involve these rules.