What is a Renko chart and how does it work?
Renko charts are a type of trading chart that eliminates minor price fluctuations, allowing traders to concentrate on the big picture. They’re comprised of Renko bricks that move at a 45-degree angle to each other up and down. A Renko chart’s brick size, which controls when a new brick will form, is determined by the chart’s user. A specific degree of price movement is required to make a Renko brick in a Renko chart. As the price climbs, the Renko bricks turn green. When the price drops, the bricks turn red. This makes it easy to see which way the price is trending right now.
When utilized appropriately, Renko charts can help to minimize price direction confusion and can be employed as part of a trend trading strategy. Learn how to use Renko charts, how to set them up when starting a new trade, and how they differ from other types of charts.
Settings and preferences for Renko charts
Take a look at the $SPX price chart below as an example. If you choose a brick size of 6, the price must move 6 points from the previous brick’s closing price in order to construct a new brick in the current direction. Because bricks cannot be formed next to each other, the price must move 12 points in the opposite way to make a brick. Moves that are less than 6 points (from the previous brick) do not result in the formation of new bricks.
It’s worth noting that the chart’s timeframe is set to daily. This means that fresh Renko bricks will only be formed depending on the previous day’s closing price. To form a red brick, the price must drop 12 points below the close, in this case the high, of the previous green brick, which is located at the far right of the chart. Because this is a daily time frame, the price could decline 30 points during the day below the closing of the previous green brick level. A new brick would not be drawn if the price closes fewer than 6 points below the last closing of the green brick, as it is only the closing prices that matter.
Learn how to use Renko charts in trading and how to incorporate them into your own trading strategy
Similar patterns exist on Renko charts as they do on candlestick or bar charts, such as head and shoulders, triangles, and double tops or bottoms. When compared to a candlestick or bar chart, such patterns may be easier to identify on a Renko chart because there are less minor price changes.
Support and resistance levels that aren’t evident on a candlestick or bar chart are highlighted in Renko charts. Renko charts that consistently turn lower or higher in a price area imply strong resistance or support. These regions can be used by traders and investors for prospective transactions, such as shorting near resistance or purchasing near support. Traders and investors could also look for breakouts in these regions on the Renko chart to see whether a new trend is starting. Writing covered calls to safeguard your long holdings when the trend is not reversing is a solid trading strategy. As an example of chart patterns, examine the chart below.
Renko charts can assist traders and investors in staying with a trend until it reaches a significant reversal point. When and if trends persist for an extended period of time, huge profits may be realized.