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Tag: RENKO

RENKO

What is a Renko Chart?

A Renko chart is a type of chart, developed by the Japanese, that is built using price movement rather than both price and standardized 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 prior brick. An up brick is typically colored white or green, while a down brick is typically colored black or red.

KEY TAKEAWAYS

  • Renko charts are composed of bricks that are created at 45-degree angles to one another. Consecutive bricks do not occur beside each other.
  • A brick can be any price size, such a $0.10, $0.50, $5, and so on. This is called the box size. Box size can also be based on the Average True Range (ATR).
  • Renko charts have a time axis, but the time scale is not fixed. Some bricks may take longer to form than others, depending on how long it takes the price to move the required box size.
  • Renko charts filter out noise and help traders to more clearly see the trend, since all movements that are smaller than the box size are filtered out.
  • Renko charts typically only use closing prices based on the chart time frame chosen. For example, if using a weekly time frame, then weekly closing prices will be used to construct the bricks.

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 bricks are not drawn beside each other. Therefore, if the stock drops back to $10.25 a down brick is not drawn next to the prior up box. The price would have to drop to $10 in order for a down brick to appear below the prior up brick.

While a fixed box size is common, ATR is also used. ATR is a measure of volatility, and therefore it fluctuates over time. Renko charts based on ATR will use the fluctuating ATR value as the box size.

Renko charts show a time axis, but the time intervals are not fixed. One brick to could take months to form, while several bricks may form within a day. This varies from candlestick or bar charts where a new candle/bar forms at specific time intervals.

Increasing or decreasing the box size will affect the “smoothness” of the chart. Decreasing the box size will create more swings, but will also highlight possible price reversals earlier. A larger box size will reduce the number of swings and noise but will be slower to signal a price reversal.

Renko charts are effective in identifying support and resistance levels since there is a lot less noise than a candlestick chart. When a strong trend forms, Renko traders may be able to ride that trend for a long time before even one brick in the opposite direction forms.

Trading signals are typically generated when the direction of the trend changes and the bricks alternate colors. For example, a trader might sell the asset when a red box appears after a series of climbing white boxes. Similarly, if the overall trend is up (lots of white/green boxes) a trader may enter a long position when a white brick occurs after one or two red boxes (a pullback).

Example of How to Use Renko Charts

Renko chart analysis and trading example
Renko Chart

The chart shows a strong uptrend in a stock with a $2 box size. Boxes are drawn based on closing prices, so highs and lows, as well as moves smaller than $2, are ignored. There is a brief pullback, marked by a red box, but then the green boxes emerge again. Given the strong uptrend, this could be used as an opportunity to enter long. Consider an exit when another red (down) box forms.

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