How Do Renko Charts Work? A Simple Trader’s Guide

Overview

The goal of this post is to delve deeper into the Renko chart. What exactly is it? What are Renko charts? How do Renko charts work? What are the advantages and disadvantages of the Renko charts? What trading technique can we adopt while performing technical analysis with Renko charts?

On Renko charts, common technical analysis tools include trend lines, support and resistance lines, chart patterns such as the Head and Shoulders pattern, the W formation – Double Bottom, the M formation – Double Top, and moving averages, among others. The technical analysis of Renko charts will be covered in greater detail later in this post, and you can find further information in this post as well.

How Do Renko Charts Work?

A Renko chart is a price chart made up of bricks that move up and down at a 45-degree angle from the preceding brick. Bricks are never placed precisely next to one another. The Renko chart’s user controls the chart’s brick size, which then controls when a new brick will develop.

As an example, consider the SP 500 [$SPX] daily Renko chart below. If a 6-point brick is utilized, the price must move 6 points from the closing price of the preceding brick in order to build a new brick in the current direction. Because bricks can not be formed next to one another, the price must move 12 points in the other direction to make a brick.

SP 500 daily Renko chart as example on how the Renko charts work and how Renko bricks are created 6/12/2021

Renko charts filter out minor price swings so that traders can focus on the broader trend. Renko bricks are used to construct the chart. The brick size must be set in order to generate a Renko brick.

As seen in the above SP 500 [$SPX] chart, new bricks are only added to the chart based on the price close and chart timeframe. The brick is not added to the chart if the closing price does not meet the brick size within the timeframe. When the price rises, the Renko bricks turn green. When the price falls, the bricks turn red. This makes it easy to identify the current direction in which the price is moving. When used appropriately, Renko charts may assist in avoiding price direction uncertainty and can be included in a trend trading strategy.

How will Renko charts help me?

Less noise than a candlestick chart makes Renko charts useful for spotting support and resistance. It’s possible that Renko traders could ride a strong trend for quite some time before seeing the formation of a single brick in the opposite direction. Gains can be maximized without risking loss by closing a trade or investment position too soon.

The Mechanics

Continuing with the above-mentioned chart, please note that the chart’s timeframe is set for one day. This means that new Renko bricks will only appear based on the day’s closing price. Because the previous brick was green and was located on the far left of the chart, the price had to rise 6 points above the high of that green brick in order to produce another green brick. Because this is a daily time frame, the price could rise 30 points above that level during the trading session the next day, but if the price closes less than 6 points above the previous green brick, no new brick will be created because only closing prices are taken into account.

Brick Size

We can proceed with our calculations knowing that new bricks are only constructed if the price movement has exceeded the specified threshold level. The size of the bricks is always the same. When determining the size of a brick, there are two approaches to take. One is referred to as the “Traditional” method, while the other is referred to as the “ATR” (Average True Range) method.

  • Traditional: This method makes use of an absolute value for brick size that has already been defined.
  • ATR: The values generated by the Average True Range (ATR) indicator are used in this method. The ATR is a financial instrument volatility indicator that is used to filter out the normal noise or volatility of a financial instrument. The ATR method automatically determines a suitable brick size. Generally speaking, the average true range (ATR) is the average of true ranges over a specified period of time. Most of the time, the ATR calculation is based on 14 periods, which is ATR (14).

Renko Charts Technical Analysis

Chart Pattern

Similar patterns exist on Renko charts as they do on candlestick charts. Some examples are head and shoulders, triangles, and double tops or bottoms. On a Renko chart, there are fewer minor price fluctuations, making such patterns easier to spot. This website offers a free preset Renko chart pattern scanner.

UNFI daily Renko chart example of chart patterns - W double bottoms and M double tops 6/12/2021

Support and Resistance

Renko charts filter out minor price fluctuations. As a result, it is useful for showing trends and may even be utilized as a trailing stop-loss.

BP daily Renko chart example of support or trend line break 6/12/2021

Renko charts indicate support and resistance levels that a candlestick or bar chart may not show. When Renko charts repeatedly flip lower or higher around a specific price region, it signals strong resistance or support. Traders can utilize these regions to identify prospective trades, such as shorting near resistance or buying near support. Traders may also look for breakouts in these regions on the Renko chart to pinpoint the beginning of a new trend.

Moving Averages

Trend Lines

Advantages of Renko Charts

  • A Renko brick-size calculator can help you determine the optimal brick size for a given time period, which is known as ATR.
  • Small price movements are filtered out to create a more visually appealing display.
  • Levels of support and resistance can easily be recognized.
  • You may use the Renko chart as an entry or exit point for trend trades, as well as a trailing stop-loss.

Disadvantages of Renko Charts

  • Less information makes a cleaner-looking chart. When utilizing a Renko chart, closing prices, highs, lows, and opening prices are all removed.
  • The optimal Renko brick size for historical data may not be suitable for future price fluctuations. The Renko chart will be repainted when using the ATR approach.
  • Trading is difficult, so there is no simple Renko method that will work in every market. Users must change the parameters to fit their individual trading styles.