Using Renko Charts in Your Trading

Candlestick versus Renko Chart Comparison
••• StockCharts.com

Renko charts are a way to view price movements of an asset that filters out minor price movements. Because those small fluctuations are removed, price trends may be easier to spot, and that feature makes Renko charts the preferred price chart for some traders.

Renko charts are also easier to read because the markers on the chart—which are called bricks, boxes, or blocks—are more uniform compared with candlestick charts, which other traders prefer using to follow price movements. This simplification comes at a cost, though, as some price information is lost.

Renko Bricks

The most important step in creating Renko charts is setting the size of the brick. It may be $0.10 in the stock market or 10 pips in the foreign exchange (forex) market. A brick forms on the Renko chart once the price has moved that amount, and not before.

A candlestick chart, on the other hand, shows the price movement over a period of time, such as one minute or one day. While there is a time axis along the bottom of a Renko chart, there is no set time limit for how long a Renko box takes to form. It could take 2½ minutes, three hours, or eight days. It all depends on how volatile the pricing of the asset is and what brick size you set.

The graphic shows both a daily candlestick chart and a $0.75 brick size Renko chart of Apple (AAPL) stock. Looking at the time axis, with this brick size, the two charts show the price action over approximately the same amount of time (early January to early July 2015). The comparison reveals differences in how the price action is portrayed.

Comparison to Candlestick Charts

The most striking difference between the Renko chart and the candlestick chart is how much smoother the Renko chart is. (The same would be true in a comparison with an OHLC [open, high, low, close] bar chart.) Each Renko brick is exactly $0.75, giving the chart a uniform appearance. On a candlestick chart, every candle body and its shadows (aka tails or wicks) appear different. 

A new Renko brick always forms at the top or bottom right corner of the last Renko brick, meaning the price action is always portrayed at 45-degree angles. That means bricks are never beside each other. Therefore, after the price advances $0.75 and an up brick is drawn, the price must decline $1.50 (two brick lengths) before a down box is drawn. For that reason, when you compare a Renko chart and a candlestick chart that are following price movements in the same asset, the candlestick chart will change directions more often.

Up bricks are typically colored white or green. Down bricks are typically colored red or black.

Another major difference between the two types of charts is that a Renko chart doesn't always give you the most current information. The chart updates only when a new brick is created. A candlestick chart and Renko chart that were captured at the same moment often show different prices. That's because the candlestick chart always shows the last price or transaction (assuming you have real-time quotes), while a Renko chart shows the price that created the last brick.

Because Renko charts are based on brick size, they also won't reflect the exact high or low the price of an asset reached. If a new brick forms at 134.25, and the price reaches 134.54 and then reverses, the candlestick chart will show the price reaching 134.54, while the Renko chart will only show the price reaching 134.25, because the price didn't move high enough, another 0.75, to create another brick.

The smaller the brick size, the quicker the price information will update on Renko charts. But a smaller brick size will also cause the chart to look more choppy.

Variations

Most trading platforms and chart websites let you choose to create bricks when the price of an asset has moved the value of its average true range (ATR) instead of a simple price amount. The ATR is an indicator of the average price movements over a certain time, with the data smoothed to make trending patterns more clear.

You set the number of time periods that you want the ATR to be calculated for. The ATR changes over time, so in this case, the brick sizes will also change.

You can also often choose to have Renko charts create bricks for the open, high, low, or close price; or the high, low, and close; or all four prices. That would result in more bricks being created and reduce the simplicity of this type of chart, but it can give you as much information as a candlestick or bar chart does.

Trading Using Renko Charts

Renko charts are most useful to day traders for spotting trends, areas of support and resistance, breakouts, and reversals. The chart's simplicity can make it easier to see those price actions and signals for making trades.

However, because of the basic price action nature of the Renko chart, traders frequently use technical indicators to provide additional information in their chart and either reinforce or warn against buy and sell signals. Moving average convergence/divergence (MACD), for example, is a measure of price momentum that gives a bullish signal when the MACD line crosses above the signal line and a bearish signal when the MACD line crosses below the signal line. Both of the lines are created using exponential moving average prices over different time periods, with more recent prices given greater weighting.