• : October 24, 2021
  • : B. Krishnakumar
 
Momentum & Renko Charts
 
Momentum is an interesting concept. In Point & Figure charts, we have this wonderful tool called anchor column to identify and/or measure momentum. But, what about Renko charts?

In this post, I wanted to share about studying momentum and using it in your decision making in Renko charts. We would be using the DMA Histogram indicator to measure momentum. I discussed this concept in the Friday webinar on October 22, 2021. I am discussing this here so that those who could not attend could a glimpse of this concept.

Here is the Renko chart of Nifty Futures in 1-min time frame and 0.1% Brick size.



The DMA histogram measures the distance between the 20-brick and 40-brick EMA. If the 20-brick EMA is above the 40-brick EMA, the DMA Histogram value will be a positive number. If the difference between 20 & 40-brick EMA is higher than the previous brick, then the histogram will be green in colour.

Remember, when there is a momentum move or a strong trend, it is logical to see a lot of green or red histograms getting printed. Successive green histograms would be printed in a strong uptrend and vice-versa. In the chart above, you will notice a strong uptrend before the red arrow mark. Notice how a series of green histograms were printed during this leg up.

Then the momentum slowed down, resulting in a divergence between the DMA Histogram and the price action. Typically, before any correction or pull back, the momentum will exhibit a slowdown and there would be at least one or multiple divergences before a mean reversion happens.

Irrespective of the time frame and instrument, you will notice that price reverts to mean and before this mean reversion, there will be a warning in the form of a momentum divergence. But just because there is a divergence it does not mean that you can take a counter-trend trade.

The mean reversion can happen through a time correction where a lot of bricks will be printed but the price will be confined to a trading range. This is the typical time correction that we get to witness as a mean reversion.

Let us now look at a smaller time frame. Here is the Nifty Futures chart plotted using a 0.05% brick size.



The negative divergence between the momentum and price action is more glaring in the lower time frame. In this example, the momentum divergence resulted in a price reversal. But even at the cost of sounding repetitive, the mean reversion can happen via sideways movement too.

Here is another example of this concept in the Nifty Futures chart, 0.05% brick size and 1-minute time frame.



The above chart captures last week’s price action where the Nifty saw a correction. Notice how at every instance of divergence, price tended to revert to mean. But the important message here is that not to get carried away and consider a counter-trend trade at every instance of divergence.

In the early stage of the trend, the divergence will not result in a significant counter-trend move. But as the trend matures, you will see a more significant pullback and the sequence continues.

Your job now is to study at least 500 charts of this concept and internalise it. Do not rush to take contra trades just because there is a divergence.

Understand the concept and the logic. We will discuss more about this, from a trading perspective, in the subsequent posts.