A trade setup must be simple and easy to execute. It has simple way of stock selection and specific entry and exit criteria. In this newsletter, we discuss a simple trade setup based on swing trading using Renko charts. This is a great setup for someone who is starting out in the market and wants to understand swing trading. We discuss only a long setup in this newsletter.

The setup has two components: Relative strength and Swing breakouts on Renko charts.

Component 1: Relative Strength

The first component of this setup is Relative strength. Relative strength is a tool used to compare the strength of a stock to the strength of a broad market index like Nifty 50. When the stock is performing better than the Index, the stock is said to be outperforming the Index. When the stock is performing worse than the Index, the stock is said to be underperforming the Index. I have explained the concept of Relative strength in my previous newsletter.

To identify Outperforming stocks for this setup, we use line chart for Relative strength. The Relative strength chart needs to meet the following conditions:

1. The chart is in an uptrend. i.e. the Relative strength line is above the 30- and 60-day Double Moving Average line.

2. The slope of the Moving Average is upward sloping.

Component 2: Swing breakouts on Renko charts

Renko charts are trend charts. Trends can be clearly decoded on these charts because of their diagonal plotting method.

On Renko charts, a series of bricks is called a swing. When the price is increasing, the swing formed is known as a bullish swing. Similarly, when the price is falling, the swing formed is known as a bearish swing.

A bullish swing breakout is in the shape of ‘N’. That is, a bullish swing, followed by a bearish swing, then followed by a bullish swing such that the price moves above the previous bullish swing’s high. A bearish swing breakout is in the shape of a mirrored ‘N’. That is, a bearish swing, followed by a bullish swing, then followed by a bearish swing such that the price moves below the previous bearish swing’s low.

As per Renko setups, bullish swing breakouts must be traded in a bullish trend and bearish swing breakouts must be traded in a bearish trend. Therefore, we add a Triple Moving Average as trend filter.

The setup is complete when the following conditions are met:

1. Stock is outperforming the Index

2. The stock is in a bullish trend

3. Price gives a bullish swing breakout

Observe the chart below of BLUESTARCO and BEL. The Relative strength chart shows a consistent uptrend. The slope of the trend was also upward sloping. At the same time, the Renko chart was forming consistent bullish swing breakouts.

I have explained more such examples in my YouTube video. Do check it out. If you found this setup useful and interesting, subscribe to the newsletter for more actionable content.