Renko Chart: How It Works and What Does it Tell You?

Renko charts are effective technical analysis tools that consider only price patterns. Unlike traditional charts, Renko charts do not take time intervals into account.

Quick insights

Renko charts – how it works?

Renko is a price-based technical analysis chart, characterized by series of bricks that are analyzed on a non-time-base model. It is generally considered one of the better ways to identify trends in the market. If you are frustrated by using multiple contradicting technical patterns and looking to find an opt tool without noises, Renko is the choice.

Renko gets its name from the Japanese word “renga”, meaning bricks. These charts are comprised of bricks or boxes, that show only the important price movements.

Renko charts are constructed by grouping smaller price movements into consolidated boxes. The size of the box/brick is determined by the value of the price movement you fix and a trend will be formed according to that unit value. If you fix the brick value to $2, a new brick will be created only when the price moves $2 on either side.

Unlike candlesticks charts, Renko charts do not depict the details of open price, closing price, or high or low prices. They typically use green and red colors to represent the price movement. Green represents the up move and red color represents the down move.

Renko charts aim to rule out minor price movements so that traders can focus more on the major price trends. Moreover, traders can have a clearer picture of the stock price movement in renko charts than in the traditional charts.

Brick calculations

Determining the size of the brick is the most crucial part of forming renko charts as accurate brick calculation needs tick data. There are typically 3 ways to calculate the Renko bar size.

Average true range – ATR

ATR is a technical analysis tool that eliminates the noise and volatility of a financial asset. The ATR value is generally taken as the brick size of the Renko chart.

Traditional

Users can randomly choose a pre-defined absolute value for the brick size. This method helps traders to anticipate when the next brick can be formed. As a thumb rule, traders fix 1/20^th of the current value of the asset price as the brick size. This works as well.

Percentage

As per this method, users can determine the brick size as a pre-defined percentage value of the asset price. This asset price value is usually the nearest closing price of the asset.

How to use renko charts?

According to your trading strategy, you can use Renko charts in different ways to display the information you want to see. Renko charts assist traders in formulating trading strategies, according to their financial goals. The considerations in common practices are:

Size of bricks

The bigger the size of the brick, the more the market has to move to form a new brick. By this, traders can avoid considering smaller price movements and focus only on the significant moves, that indicate the strength of the underlying trend.

Range trading

When the market moves sideways for quite some time, it will be difficult to determine the breakout points. In such cases, Renko charts help traders when they are incorporated into trading strategies.

In a side-ways range, the market moves between support and resistance levels. A formation of a new brick above the resistance or below the support level indicates the resumption of a new trend. This helps traders utilize this opportunity to initiate new positions.

Breakout trading

Renko charts enable traders to identify breakouts from the key supports and resistance levels. Traders usually make mistakes of entering into positions in false breakouts or false signals. However, since renko charts ignore minor price changes, they help traders identify the conclusive breakouts and avoid potential risk of loss.

Naturally renko charts keep tracking the market momentum and pinpoint the moment when exactly a breakout occurs. Applying this renko trading strategy ensures you enter the market ahead of time and place a stop-loss order at the breakout point.

Pros of renko

• Renko charts provide investors with a clear view of the price behavior and trends. They are easy to view and interpret.
• The Renko box size is determined only by you depending on the parameters you choose.
• By ruling out the parameters such as time and minor price moves, renko charts have less noise compared to traditional charts.
• Renko charts are helpful in identifying support and resistance levels so that the traders can fix the entry and exit points.
• Renko charts provide information on market volatility. It is the size of the blocks that indicates the volatility at any given time.
• When the blocks of the chart show moving in opposite directions, renko charts signal a possible trend reversal. This helps traders book profits in their current positions.

Cons of renko

• One needs a deep level of knowledge and foresight to identify breakouts and hence renko charts seem retrospective for many traders.
• It is most of the time difficult to determine the right strategy that could be a good fit for your market using Renko charts.
• Making errors in determining the block size and choosing the right time frame for your trading strategy might be crucial with Renko charts. Even a small error can lead to expensive mistakes.

Conclusion

Renko charts provide a very simple view of price action. Since they are designed to filter out the other elements of the assets and solely rely on the price moves, they eliminate market noises. Though there are certain limitations in using renko charts, knowledgeable traders implement them in their strategies to succeed in trades.