The goal of this post is to go over the Renko chart in greater detail. What are Renko charts and how do they work? What is the formula for calculating the brick size on a Renko chart? When it comes to performing technical analysis with Renko charts, what trading technique should we be employing?
What is a Renko Chart?
The Renko chart originated in Japan. Renko focuses solely on price movements. Renko charts are brick-based. A new brick is made when the price reaches a specified amount. Another brick is made and placed at a 45-degree angle. Up bricks are green, while down bricks are red.
How are Renko brick sizes calculated?
In order to determine the exact size of a brick, there are two approaches that can be used. The first is known as the “Traditional” method, while the second is known as the “ATR” (Average True Range) method.
This method makes use of an absolute value for brick size that has already been defined by the system or user.
In this method, the values generated by the Average True Range (ATR) indicator are used to calculate the brick size. According to general definitions, the average true range (ATR) is the average of all true ranges over a specified period of time. In most cases, the ATR calculation is based on 14 periods, which is ATR (14). The ATR method then determines the appropriate brick size.
Many people utilize a 14-period ATR. The formation of a new brick, for example, occurs when the ATR (14) of the SP 500 Daily Renko chart is 40. The price must settle at least 40 points above or below the boundaries after each day’s trading session to result in new bricks being added to the chart.
Disadvantages of the ATR Calculation Method
The ATR calculation formula technique does not sit well with me since the brick sizes might fluctuate greatly depending on the instrument’s volatility during the previous 14 days. To demonstrate, as of October 12, 2021, Tesla had a brick size of $20.31. The size is now $58.69. As a result, the chart created at two separate dates differs substantially from one another.
Traditional Calculation Method
Personally, I prefer to use the traditional method on SP 500, which consists of a predetermined number, such as 6 or 10 points, that I set in advance. There is no need to be concerned about major changes in how the charts are built under the Traditional method because the size does not vary with this method.
How is Renko calculated?
For example, we use a traditional 10-point brick size in the 15-minute SP 500 Renko chart shown below. When the SP 500 closes up or down by at least 10 points every 15 minutes, a new brick or more will be added to a 15-minute Renko chart. Each brick has an upper and lower limit separated by ten points.
Let’s say the final brick limits are 4,100 and 4,110. At 10 a.m., the SP 500 was trading at 4,100. At 10:15 a.m., it was trading at 4,105, which was between the final brick’s boundaries of 4,100 and 4,110. As a result, no new bricks will be produced.
At 10:30 a.m., the SP 500 was trading at 4,075. Two more red bricks will be inserted since it was closed at 25 points lower than the previous lowest boundary of 4,100. However, because the price movement is set at 10 points for each brick, only two bricks will be created. The last brick’s lower and upper limits are now 4,080 and 4,090.
Which time frame is best for Renko chart?
A Renko chart has a time axis at the bottom, but there is no set limit on how long it takes for a Renko block to form. It all depends on how volatile the price of the asset is and what size bricks you set.
In fact, when you choose hourly for the timeframe and 10 for the brick size, the chart just checks the price every hour. A brick may be created if the price goes up or down by more than 10 units. On the other hand, if the change in price is less than 10, no brick is made. Remember that you can only put a brick diagonally above or below the one before it.
This is a matter of personal preference and trading style. For the SP 500, I favor the hourly and daily Renko charts.
Renko Chart Technical Analysis
Understanding Renko chart features is key to getting the most out of Renko charts.
- Renko charts are trend-following charts.
- Renko charts are built solely on closing prices. No highs or lows are considered.
- Larger blocks tend to obscure minor retracements and corrections. So only the longer and broader patterns stand out. This is beneficial to investors with a longer time horizon.
Because of the way Renko charts are built, drawing support, resistance, and trend lines is simple. After drawing the support, resistance, and trend lines on the charts, you may decide how to manage your portfolio’s assets. Renko charts are trend-following charts, which means they may optimize your profits.
Compared to other types of charts, Renko charts are extremely successful at detecting support and resistance levels. When a trend is detected, Renko traders can more easily capture the bulk of the trend and maximize earnings.