How to trade futures with Renko charts

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Trading futures can be a great way to make profits on a wide number of markets. There are many things that draws a trader to the futures markets, some of them are leverage, regulated markets, centralized exchange and standardized contracts to name a few. Futures trading is a derivatives market based trading, meaning that the price of the futures markets are derived from the underlying asset that is being tracked.

For example, if you were trading Gold futures, the pricing you see is derived from the spot gold prices that are marked to market on a daily basis. The derivatives nature of futures makes it easy for speculators as well as investors to hedge their exposure from the underlying markets. Let’s say you are invested in the SPDR Gold ETF (GLD) and you are concerned that gold prices will drop. But you are not sure on how steep the correction will be. What would be the best thing to do without affecting your portfolio? You can simply go short on gold futures contracts and make a profit if you were right.

This article won’t go into the details of futures contracts, what they are and how they differ from other markets, on the contrary, the article assumes that the reader already knows about the futures markets and would like to apply Renko charts analysis to their futures trading.

How to get started trading futures with Renko charts?

The futures markets unlike forex or stocks, is a mixed market. It goes without saying that when one mentions forex, the first thing that comes to mind is currencies. When you talk about stocks, the first thing that comes to mind is of course stocks. Each of these homogenous markets have something in common and you would know on a broad level how the markets react and the factors that influence these markets.

Furthermore, you can expect to see a $2 – $5 move in stocks and sometimes more, which won’t be that surprising to a stocks trader. Likewise, you can expect to see a 100 – 500 pip move in forex, which again doesn’t come as a surprise.

With the futures markets, there is a broad mix of underlying assets being tracked making futures heterogeneous markets. You can trade metals, interest rates, currencies, live cattle, agriculture and many more assets.

Diversification of the Futures Markets

Diversification of the Futures Markets

You can understand by now that the different make up of the markets means that trading can be a bit tricky. You can’t apply one trading strategy built for a particular futures market asset class to another. Think about it. Going back to the same example, can you expect a strategy that is built to trade forex (and thus by extension, currency futures) be able to give you the same results when trading equity index futures?

Obviously not! Still, many traders end up making the mistake and apply a trading strategy without thinking on whether the strategy makes any logical sense or not.

Trading Futures with Renko – Start with Renko Box Size

The Renko box size is the most important aspect that can determine your success or failure with futures trading. Having the right box size is important as it can help you to understand your risks while also enable you to build a profitable trading strategy.

The first step in determining the right box size is to understand the minimum tick and the tick size.

The minimum tick in a futures market is the minimum fluctuation in price. Because the futures markets are a diversified set of assets, the minimum tick size can vary. For the E-mini S&P500 futures for example, the minimum tick size is 0.25 points with each point representing $12.50 in dollar value. For the Dow Jones E-mini futures, the minimum tick size is 1 index point valued at $5.

As you can see, using the same yard stick for S&P500 and the Dow futures doesn’t make any logical sense and it certainly doesn’t make any sense when you apply the same yard stick to different markets as varied as equity index and commodities for example.

You can read this example about Emini S&P500 Futures Renko chart and how the box size was selected based on the tick size and the tick value.

Once you have determined the tick size and the tick value, the next step is to look at your trading capital and apply some risk management principles. Let’s run this with an example.

Assume that you want to trade Crude oil futures (CL). The minimum tick size for crude oil is $10 for a $0.01 tick size. Therefore, it now comes down to how much of risk you can bear. Assuming your trading capital is $5000, and you can risk 2%, that roughly translates to $100 in risk. Converting this $100 to ticks you can divide the risk by the minimum tick, which is $100/$10 = $10, which is 10 ticks or $0.10 (10 x $0.01).

Thus, from the above, we have a Crude Oil futures Renko chart with a fixed box size of 0.10, as shown below.

Crude Oil Futures Renko chart

Crude Oil Futures Renko chart

Can this same technique be applied to other futures instruments too?

Yes and this is just one of the most basic ways to build a Renko chart for futures trading. You can also looking increasing or decreasing the Renko box size in multiple of 5 or whatever number you fancy until you find that the Renko chart captures trends on the futures markets you are focusing on.

Once you have the right box size, you can then proceed towards looking at applying one of the many different Renko trading strategies that are outlined here.