A Renko chart is a unique type of chart developed by the Japanese, built using price movements rather than a combination of price and time intervals. Named after the Japanese word for bricks, renga, the Renko chart visually looks like a series of stacked bricks. A new brick is created when the price moves a specified amount known as the box size, and each brick is positioned at a 45-degree angle to its predecessor.
Why Choose Renko Charts?
- Clarify Trends: Renko charts use bricks arranged at 45-degree angles, helping traders readily identify trend direction without irrelevant market noise.
- Customized Box Size: Traders can select box sizes such as $0.10, $0.50, or $5. Box sizes can also be determined using the Average True Range (ATR).
- Time-Agnostic: While the charts have a time axis, the scale isn’t consistent. Some bricks may take minutes to form, others longer depending on price movement.
- Precision Focus: By filtering out minor price movements that are less than the box size, these charts emphasize significant trends only.
- Closing Prices: Typically using closing prices of the chosen time frame, Renko charts prioritize meaningful data points.
What Can You Learn from a Renko Chart?
Renko charts simplify trend analysis by filtering out insignificant price changes. The key to constructing a Renko chart is setting an appropriate box size. For instance, for a stock trading at $10 with a $0.25 box size, a new brick is drawn only when its closing price hits $10.25 or higher.
Unlike traditional bar or candlestick charts, Renko charts solely use the direction of the bricks and their distance increments. For example, consider a fixed box size of $2:
- Uptrend: If a series of green bricks appears, it illustrates a clear upward trend.
- Downtrend: Conversely, red bricks signify a downward trend.
- Precision Entry/Exit: Traders may opt to buy when the first green brick appears after a red brick in an overall upward trend and consider selling at a similar pivot in a downward trend.
Example of How to Use Renko Charts Effectively
In the given example, with a box size of $2 per brick, the green bricks demonstrate an uptrend despite minor fluctuations. A short retracement shown by the red brick, lasting only briefly, allows traders to consider long positions during the larger upward movement.
Bridging Renko and Heikin Ashi Charts
While Renko and Heikin Ashi charts both emerged from Japanese trading methodologies, their construction differs. Heikin Ashi charts average the open, high, low, and close prices of both the current and previous periods, making each box distinct in size. Both charts find utility in predicting trends but vary in their approach to rendering market movements.
Understanding Renko Chart Limitations
Renko charts offer an abridged perspective compared to candlestick or bar charts, as they omit highs and lows in favor of closing prices. This can result in some volatility being missed until subsequent bricks form. Traders are advised to supplement their strategies with stop-loss orders and use additional technical analysis to avoid potential false signals.
Setting Up a Renko Chart on Major Platforms
Thinkorswim: Change the ‘Chart Styles’ to ‘Range Type: Renko Bars’ to adjust the price range for your desired box size.
TradingView: Available through a paid subscription, access the chart menu and modify the settings to select your box size.
Choosing the Right Box Size
The optimal Renko box size is contingent on your trading horizon and risk tolerance.
- Long-Term Trading: Larger box sizes for broader trends, risking missed minor movements.
- Short-Term Trading: Smaller box sizes to catch swings but be wary of noise.
By mastering these tools, traders can refine their trading strategies and make better-informed decisions.
Stay tuned for further updates and more advanced insights into various trading techniques. Make your trading journey smarter with Renko charts!
Related Terms: Heikin Ashi Charts, Candlestick Charts, Average True Range, Support and Resistance Levels.
