Overview
Here, we’ll take a closer look at the Renko chart and discuss its benefits and characteristics. It explains how to create Renko chart signals to use in trading and investing.
How Effective Are Renko Chart Signals?
With much less clutter than a candlestick chart, Renko charts are useful for pinpointing support and resistance levels. Traders using Renko charts may be able to profit for a considerable time in the direction of a strong trend. Knowing that Renko charts simplify the process of locating trendlines and support and resistance levels, we will start with an overview of Renko’s characteristics. Next, we’ll discuss brick size, which impacts how we draw trendlines and support and resistance levels Examples of drawing trendlines and support and resistance levels to generate Renko chart signals are provided afterward.
The Renko Chart’s Essence
In theory, the Renko chart, which is constructed with bricks, is quite similar to the Point and Figure chart. Renko charts employ bricks, whereas P & F charts employ X and O. Because the emphasis is on price changes, time is irrelevant in a Renko chart. The time unit, on the other hand, is critical since it dictates how the chart is created. Keep in mind that the Renko chart only uses closing prices as its data source.
The Renko is a price movement chart that does not take time into account. If the brick [block] size is 10, the time unit is hourly, the price closes 20 points higher or lower than the previous close after one hour, two more bricks are added to the chart. The current brick, for example, has a low 90/high 100 value. After an hour, the price settled at 120. Because each brick size is set at 10, two more bricks are drawn. During each hour, price fluctuations are disregarded. If the price increases 25 points but then reverses and falls 5 points after one hour, no new block is formed.
The Brick Sizes
In charting software, there are two ways for determining brick size.
Traditional Brick Size
New bricks are only drawn if the closing price exceeds the brick size. The size is fixed at a certain value. The set value may change from one to another based on the underlying stock’s or index’s volatility. I used a brick size of 10 when trading the S&P 500 index. My brick size for Apple (AAPL) is 2. A benefit of sticking with the standard size is that support and resistance levels and trendlines are more consistent. Unlike the ATR approach, the brick sizes adapt to the level of volatility. When the size of the bricks changes, it’s likely that the trendlines and support/resistance levels will change.
Average True Range (ATR)
The ATR value (preset = 14 bars) is used to automatically adapt the brick size to market volatility. The disadvantage is that if the ATR value changes, you must redraw your chart to reflect the new ATR value.
How to Create Your Own Renko Chart Signals?
Using Support and Resistance Levels
Renko charts are direct and to the point, indicating obvious levels of support and resistance. When a trader draws horizontal lines just above the lowest brick of a downward trend, the support zone is not only highlighted, but a break above this level usually suggests that the previous decline has ended. As a result, the long entry point for catching the new leg up is indicated.
If, on the other hand, the price rises and then breaks the horizontal line to the downside, it suggests a breach of the support level and a suitable short entry.
Using Trendlines
By connecting past highs and lows, resistance and support trendlines can help define entry and exit positions. The concept is analogous to horizontal support and resistance levels.
A trendline is just a diagonal line that represents a price range or trend. These lines follow the price movement in an attempt to give traders an indication of how high or low the price may go in a given timeframe. The trendline rises in tandem with the price. When the price falls, the trendline falls with it.
When prices are rising, connecting the lows with a line results in an ascending trendline—an “uptrend.” A trendline can also be drawn along the highs of a trend. This shows the rising angle, the strength of the price move, and the relative strength of the trend.
When the price falls, the highs, or lesser highs, fall with it. A descending trendline, sometimes known as a “downtrend,” is produced by connecting successive lower highs. A trendline drawn along the lows may also be used to demonstrate the angle of descent and the intensity of the downward price movement.
Examples of Trendlines and Renko Chart Signals
Downward trendlines imply that market participants would choose to sell an asset rather than purchase it. When there is a downward trendline, it is best to avoid holding a long position; a gain on a move higher is unlikely when the longer-term trend is negative. An uptrend, on the other hand, implies that demand for the asset is greater than supply and that the price is projected to rise further.
Trendlines are a fundamental tool that may be used to assess the overall direction of a market, but they can also be used by traders to forecast areas of support and resistance.
Technical traders pay close attention when the price approaches a trendline, since these areas usually play a key influence in determining the market’s short-term direction. As the price reaches a critical support/resistance level, one of two things can happen: The price will either bounce off the trendline and continue in the direction of the previous trend, or it will pass through the trendline, suggesting that the current trend is reversing or weakening.
The ideal way to use the Renko chart is to leverage its simplicity and clarity to discover patterns and trends to aid in investment and trading decision.