Renko charts are a type of technical analysis that depends on price movements. Unlike the candlestick charts or bar charts, Renko charts are time-independent. The Renko charts were developed in Japan, and the word Renko comes from the Japanese word for bricks, “renga.” This is because the structure of the Renko charts looks like a series of bricks. Renko charts are most useful to day traders for spotting trends, areas of support and resistance, breakouts, and reversals. Their simplicity can make it easier to see those price actions and signals for making trades
What are the Renko charts?
The Renko charts compromise a series of bricks; each brick moves with the price movement at an angle of 45 degrees. The movement of bricks can be up and down depending on the direction of the price. An up brick is colored as green or white, and a down brick is colored red or black.
The bricks can be of any price, and this is called a box size. When the price moves out of the box size, Renko charts present to buy or sell signals. For example, if a currency pair has a box size of 100 pip, the Renko chart will place a brick in the next column when the previous brick’s price has surpassed the box size amount.
When the box size is increased or decreased on the Renko charts, it affects its performance. Decreasing the box size create more swings and helps in finding potential reversals. Contrarily, increasing the box size filters any market noise and give the direction of the price.
At first glance, Renko charts look exactly like candlestick charts. However, both are different in construction and specifications.
How to use the Renko charts?
As the Renko charts are not dependent on time, they show support and resistance levels more effectively than bar charts or candlestick charts. This is because the Renko charts consider price movements and give fine opportunities for support and resistance levels.
As the chart below illustrates, when the trend occurs on the Renko charts, there is a possibility that it can go on for long, even if there is a brick in the opposite direction.
Renko charts produce an entry point when the color of a few bricks changes. For example, when seeing red bricks changing to green bricks, a trader may decide to enter long. Alternatively, if red bricks continue, he/she may go short.
When a different color brick emerges in a series of same-color bricks, there is a pullback chance. A trader can enter after the pullbacks and exit when bricks change their colors.
One way to utilize the Renko charts is to use ATR (average true range) with the bricks pattern. The ATR is a technical indicator that measures volatility. When used on the Renko charts, the ATR values should be considered as the box size.
A lot of traders face the issue of renko charts repainting. Repainting means that you suddenly see a green renko being formed only for it to be turned into a red renko. For example, if you keep the time frame at 1 hour, candles can get repainted any time before the completion of 1 hour. For that reason, I would wait until a renko bar has closed for confirmation of the direction.
Renko charts trading strategy
he main difference between the Renko chart and the candlestick chart is that Renko charts are smoother than the candlestick charts. The same also holds for an OHLC (open, high, low, close) bar chart.
As Renko charts are time-independent, the display of bricks is not fixed. For example, a brick could take several months to appear, or there could be several bricks formations in a day. When devising a trading strategy, traders should look into this factor.
Also, the Renko charts work best for asset prices on longer timeframes like monthly or weekly charts.
Renko charts buy strategy
- Locate the green or white bricks on the chart.
- Wait for two or three bricks to form.
- Enter the trade after the pullback.
- Place a stop-loss near the recent low from the entry point.
- Exit the trade when the bricks change their color.
Renko charts sell strategy
- Look for the red or black bricks on the chart.
- Wait for two or three bricks to form.
- Enter the trade after the pullback.
- Place a stop-loss near the recent high from the entry point.
- Exit the trade when the bricks change their color.
Renko charts conclusion
Renko charts provide effective analysis, as they filter market noise and gives exact entry and exit points. Traders can also use ATR indicator on the Renko charts to measure volatility and box size value.
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.
There is no statistical evidence that Renko charts are profitable more than standard candlesticks charts for traders. However, Renko charts effectively identify support and resistance levels for some traders than standard charts because of different visual representations and more negligible noise.
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