Renko charts are a way to view asset price movements by filtering out minor price movements. By removing those small fluctuations, price trends may be easier to spot with a Renko chart, and that feature makes them the preferred price chart for some traders.
Renko charts are also easier to read, because the markers on them (called "bricks," "boxes," or "blocks") are more uniform, compared with candlestick charts, which other traders prefer for following price movements. This simplification comes at a cost, though, as some price information is lost.
- One important step in creating Renko charts is setting the size of the brick; a brick only forms on the chart once the price has moved by the set amount.
- There is no set time limit for how long a Renko box takes to form—it depends on how volatile the asset is and what brick size you set.
- The most striking difference between the Renko chart and the candlestick chart is how much smoother the Renko chart is.
- Renko charts may help day traders spot trends, areas of support and resistance, breakouts, and reversals.
The most important step in creating Renko charts is setting the size of the brick. You may set it to $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 by 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 2.5 minutes, three hours, or eight days. It all depends on how volatile the pricing of the asset is and what brick size you set.
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. If a trader sets Renko bricks to be $0.75, then each Renko brick is exactly $0.75, giving the chart a uniform appearance. On a candlestick chart, every candle body and its shadows (otherwise known as "tails" or "wicks") appear different.
A new Renko brick always forms at the top or bottom right corner of the last Renko brick, meaning that the price action is always portrayed at 45-degree angles. That means bricks are never beside each other. Therefore, after the price advances by $0.75, and an up brick is drawn, the price must decline by $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 price that an asset reached. Suppose a trader has set their Renko chart to make a new brick every $0.75. 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 more quickly the price information will update on Renko charts, but a smaller brick size will also cause the chart to look more choppy.
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 would 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. Their 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 a greater weighting.