How do we create a great renko charts forex trading method? A winning forex trading system uses 5 components.
If you want a trading method which is likely to make more money than it loses, you need to consider the following 5 items.
1. Accuracy 2. Reward to Risk Ratio (Reward/Risk) 3. Expectancy 4. Position Size 5. Account Equity
How many times we win is referred to as accuracy. If we placed 10 trades and win 9 trades and lose 1 trade, our accuracy is 90%.
The Reward to Risk Ratio compares how much you gain to how much you lose.
If we risk $500 to make $1000, our reward is $1000.Our Reward to Risk Ratio is $1000/$500 or simply a 2 to 1 Reward/Risk Ratio.
Expectancy represents how often you are able to place a trade, or opportunity. If you place 10 forex trades per month with your system, your annual expectancy is 120.
If your forex trading system allows you to enter 15 trades per day x 20 trading days per month x 12 months per year then your annual expectancy is 15 x 20 x 12 = 3,600.
Money management is represented by Position Sizing. How "big" is our risk? It tells you how many units to risk per trade. The vast majority of traders use a fixed percentage of trading equity risk per trade.
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 forex trading strategy will incorporate all 5 of these important components.
How do we use these 5 variables to develop a Renko trading system? This is what I suggest;
Almost every new forex trader dreams of 100% accuracy. But let's be realistic here OK? I think too many market participants focus on just this one variable. They continue to search for the "holy grail" system in an effort to improve their accuracy.
For our example let's just say we win 8 out of every 10 trades, or 80% accuracy.
We will use a simple 1 to 1 Reward to Risk Ratio while we develop our Renko trading system for this example. If we risk $200, our winners will be $200.
We will start with a $10,000 account size and risk 2% 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 $10,000 and our Position Size has been defined as 1% risk per trade. Our opportunity, or expectancy to trade, is 40 trades per month.
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.
We should look to risk 3 to 5 Renko bars to gain 3 to 5 Renko bars.Our reward to risk ratio is 1 to 1.
Let's do the math together:
2% Risk per Trade = 2% x $10,000 Account Equity = $200 Risk Per Trade. The Reward is also $200.
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.
32 winning trades x $40 Reward = $1,280 winning trades. 8 losing trades is -$320.
$6,000 + (-2,000) = +4,000.
This is how you use the 5 key elements to a good trading system and apply it to developing a Renko trading system.
If you want a trading method which is likely to make more money than it loses, you need to consider the following 5 items.
1. Accuracy 2. Reward to Risk Ratio (Reward/Risk) 3. Expectancy 4. Position Size 5. Account Equity
How many times we win is referred to as accuracy. If we placed 10 trades and win 9 trades and lose 1 trade, our accuracy is 90%.
The Reward to Risk Ratio compares how much you gain to how much you lose.
If we risk $500 to make $1000, our reward is $1000.Our Reward to Risk Ratio is $1000/$500 or simply a 2 to 1 Reward/Risk Ratio.
Expectancy represents how often you are able to place a trade, or opportunity. If you place 10 forex trades per month with your system, your annual expectancy is 120.
If your forex trading system allows you to enter 15 trades per day x 20 trading days per month x 12 months per year then your annual expectancy is 15 x 20 x 12 = 3,600.
Money management is represented by Position Sizing. How "big" is our risk? It tells you how many units to risk per trade. The vast majority of traders use a fixed percentage of trading equity risk per trade.
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 forex trading strategy will incorporate all 5 of these important components.
How do we use these 5 variables to develop a Renko trading system? This is what I suggest;
Almost every new forex trader dreams of 100% accuracy. But let's be realistic here OK? I think too many market participants focus on just this one variable. They continue to search for the "holy grail" system in an effort to improve their accuracy.
For our example let's just say we win 8 out of every 10 trades, or 80% accuracy.
We will use a simple 1 to 1 Reward to Risk Ratio while we develop our Renko trading system for this example. If we risk $200, our winners will be $200.
We will start with a $10,000 account size and risk 2% 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 $10,000 and our Position Size has been defined as 1% risk per trade. Our opportunity, or expectancy to trade, is 40 trades per month.
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.
We should look to risk 3 to 5 Renko bars to gain 3 to 5 Renko bars.Our reward to risk ratio is 1 to 1.
Let's do the math together:
2% Risk per Trade = 2% x $10,000 Account Equity = $200 Risk Per Trade. The Reward is also $200.
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.
32 winning trades x $40 Reward = $1,280 winning trades. 8 losing trades is -$320.
$6,000 + (-2,000) = +4,000.
This is how you use the 5 key elements to a good trading system and apply it to developing a Renko trading system.
About the Author:
Tom Grennell is a forex trading system developer. He shares his passion for the forex markets via his detailed writings and recommendations. His favorite ForexRenko Charts FX Trading System can be found at Forex Renko Charts
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