A Renko chart is a type of chart, developed by the Japanese, that is built using price movement rather than both price and standardised time intervals like most charts are. It is thought to be named after the Japanese word for bricks, “renga,” since the chart looks like a series of bricks. A new brick is created when the price moves a specified price amount, and each block is positioned at a 45-degree angle (up or down) to the right of the prior brick. An up brick is typically colored white or green, while a down brick is typically coloured black or red.
Renko charts
Source: Tradingview
Construction of Renko Charts
Renko bars or bricks are constructed using only closing prices and are placed at 45-degree angles next to each other. While they have a time axis, it is only meant to be considered if the set movement (closing prices) has been realised and not to show elapsed time. Bullish bricks form above the previous bricks, whereas bearish bricks form below the last bricks.
Renko bricks are never drawn next to each other. For an opposite brick to be printed next to the other, the asset price must move at least twice the set movement. For instance, if a brick size is 50 pips, for a Renko chart to show a transition from a bullish brick to a bearish brick, the price must close lower by at least 100 pips.
What Does a Renko Chart Tell You?
Renko charts are designed to filter out minor price movements to make it easier for traders to focus on important trends. While this makes trends much easier to spot, the downside is that some price information is lost due to simple brick construction of Renko charts.
The first step in building a Renko chart is selecting a box size that represents the magnitude of price movement. For example, a stock may have a $0.25 box size or a currency may have a 50 pip box size. A Renko chart is then constructed by placing a brick in the next column once the price has surpassed the top or bottom of the previous brick by the box size amount.
For the stock example, assume a stock is trading at $10 and has a $0.25 box size. If the price moves up to $10.25, a new brick will be drawn. That brick will only be drawn once the price closes at $10.25 or higher. If the price only reaches $10.24, a new brick will not be drawn. Once a brick is drawn it is not deleted. If the price rises to $10.50 or higher (and closes there), another brick will be drawn.
Renko Support and Resistance Levels
Renko charts show strong support and resistance levels when the bricks alternate at a certain price area for some time. At these levels, traders can trade range-bound strategies and watch out for potential price breakouts. A range-bound play will involve buying near support areas and selling near resistance. Because Renko charts highlight strong support and resistance areas, traders can watch out for price breakouts and ride the new trend.
Renko Support and Resistance levels
Renko Chart Patterns
As Renko bricks are drawn over time, they also form chart patterns that can be found in typical candlestick charts, such as double tops and double bottoms, head and shoulders, and triangles. When such chart patterns form on a Renko chart, they are easy to spot and are more reliable and have high probability opportunities.
Renko Chart Patterns
Pros and Cons of Renko Charts when Trading
Pros:
- Renko charts provide a broader view of the market and help identify long-term trends in the market (short-term noise is filtered out).
- Renko charts help traders identify strong support and resistance areas in the market.
- Renko charts help traders ride long-term trends for maximum profits.
- Renko charts help traders identify markets where the trend has definitively reversed. This can assist in determining when to offset positions in trending markets.
Cons:
- Renko charts are constructed by using only closing prices. This leaves out important price information such as open, high, and low prices.
- Renko charts can be very limiting for short-term trading strategies such as scalping by using only closing prices.
- Renko charts are also prone to false signals, especially when there is choppy price action in the market, leading to bullish and bearish bricks alternating several times.
Conclusion
Renko charts offer a simplified yet powerful way to analyze price movements and identify trends in financial markets. By focusing solely on significant price changes and filtering out noise, Renko charts provide traders with a clearer picture of market dynamics and actionable insights for making informed trading decisions. Incorporating Renko charts into your trading strategy can enhance your ability to spot trends, identify entry and exit points, and manage risk effectively. Whether you’re a novice trader or an experienced investor, mastering the art of Renko chart analysis can give you a competitive edge in the dynamic world of trading. Happy trading!!
