key Takeways
- Renko charts are made up of bricks aligned at 45-degree angles from each other, with no consecutive bricks placed side by side.
- Each brick represents a specific price movement, known as the box size, which can vary (e.g., $0.10, $0.50, $5). The box size can also be determined using the Average True Range (ATR).
- Although Renko charts have a time axis, the formation of bricks isn’t tied to a fixed time interval. Some bricks take longer to form, depending on how long it takes the price to meet the box size criteria.
- These charts are effective in filtering out market noise, allowing traders to more easily identify trends by excluding price movements smaller than the box size.
- Renko charts typically rely on closing prices from the selected time frame. For instance, in a weekly chart, only the weekly closing prices are used to create the bricks.
What Is a Renko Chart?
A Renko chart, originating from Japan, is a type of chart that focuses on price movement rather than traditional time-based intervals. Its name likely comes from the Japanese word “renga,” meaning “bricks,” as the chart’s appearance resembles a series of stacked bricks. A new brick is added only when the price shifts by a certain amount, disregarding time. These bricks are plotted at 45-degree angles to the right of the previous one. Typically, upward price movement bricks are colored green or white, while downward price movement bricks are red or black.
How Does a Renko Chart Help Traders?
Renko charts are designed to filter out minor price fluctuations, allowing traders to focus on key trends more easily. Although this makes it simpler to identify trends, it also means that some price details are lost due to the simplified construction of the bricks.
To create a Renko chart, the first step is to determine a box size, which represents the price movement threshold for a new brick to form. For example, a stock might have a box size of $0.25, or a currency might use a 50-pip box size. Once the price surpasses the previous brick’s level by the chosen box size, a new brick is placed in the next column.
Let’s take an example of a stock trading at $10 with a box size of $0.25. If the price rises to $10.25 or higher, a new brick is drawn, but only when the price closes at or above that level. If the price only reaches $10.24, no new brick is formed. Importantly, once a brick is added, it is not removed. Should the price continue to rise to $10.50, another brick will appear. However, if the price drops to $10.25, no down brick is created unless the price falls all the way to $10.
Bricks in Renko charts are never placed side by side. In the stock example, if the price falls back to $10.25 after forming an up brick, a down brick won’t be created next to the previous up brick. The price would need to fall to $10 for a down brick to form below the up brick.
While using a fixed box size is common, traders can also set the box size based on the Average True Range (ATR), which measures volatility. The ATR-based Renko chart will use a dynamically changing box size that reflects the market’s current volatility conditions.
Although Renko charts display a time axis, the time intervals aren’t constant. It may take months for one brick to form, while multiple bricks might be created within a single day. This differs from candlestick or bar charts, where new candles or bars form at consistent time intervals.
Adjusting the box size has a significant impact on the chart’s appearance. A smaller box size will reveal more price swings and potential reversals earlier, while a larger box size smooths out the chart but may delay signals of price reversals.
Renko charts are particularly effective for identifying support and resistance levels because they filter out much of the noise present in candlestick charts. Traders who catch a strong trend on a Renko chart can potentially ride that trend for an extended period, as bricks in the opposite direction are only formed after significant price movement.
Typical trading signals on Renko charts occur when the trend reverses and the bricks change color. For example, after a series of upward green bricks, a red brick might signal a potential sell opportunity. Conversely, in an upward trend, a new green brick after one or two red bricks (indicating a pullback) might signal a long entry.
Renko charts, by filtering out minor movements and focusing on key price changes, offer a clear way for traders to track trends and potential reversal points.
Practical Application of Renko Charts in Trading
The chart illustrates a robust uptrend in a stock using a $2 box size, where only closing prices are considered. Minor fluctuations—such as highs, lows, and price movements smaller than $2—are disregarded. During the uptrend, a brief pullback is indicated by a single red brick, followed by the continuation of green bricks signaling the resumption of the upward momentum. In this scenario, traders might view the red brick as a temporary retracement and consider entering a long position as the green bricks reappear, signaling strength. An ideal exit point could be when another red brick forms, indicating a potential reversal.
Following the uptrend, a pronounced downtrend emerges. Traders can apply a similar strategy for shorting. During the downtrend, they may wait for a pullback signaled by a green brick and then enter a short position when a new red brick appears, suggesting the downtrend is likely to continue. The exit could be when a green brick forms, signaling a potential upward reversal.
These guidelines serve as general strategies. More conservative traders might prefer to see two or more consecutive bricks in the same direction before committing to a trade entry or exit.
Drawbacks of Using Renko Charts in Trading
Renko charts provide less detailed information compared to candlestick or bar charts due to their lack of reliance on time. For example, during periods of consolidation or ranging markets, a stock may be represented by a single brick, which doesn’t fully capture the price movements that occurred within that time frame. While this simplification may benefit traders focused on broader trends, it can leave others without critical intraday data.
Another limitation is that Renko charts only consider closing prices, ignoring highs and lows. This omission excludes important price fluctuations, which can significantly differ from closing levels. Although using only closing prices helps reduce market noise, it also introduces the risk of delayed signals. A substantial price movement might occur before a new brick is formed, which could prevent traders from exiting a position in time to minimize losses. As a result, many traders combine Renko charts with fixed stop-loss orders to mitigate this risk rather than relying solely on Renko signals.
Additionally, because Renko charts are designed to follow general price trends, they are prone to generating false signals. The bricks may change color prematurely, creating a whipsaw effect. Therefore, it’s essential to pair Renko charts with other technical analysis tools to validate trading signals and avoid acting on misleading trends.
