Renko Definition, How It Works and What Does It Tell You

Renko: Definition, How It Works and What Does It Tell You?

Renko charts are a type of technical analysis chart that originated in Japan. Unlike traditional candlestick or line charts, Renko charts focus solely on price movement, filtering out noise and time. The name “Renko” comes from the Japanese word “renga,” meaning brick. This reflects their core element – a series of uniform-sized price blocks (bricks) that represent a pre-determined price movement.

Renko charts build bricks only when the price moves by a specified amount. Each brick sits at a 45-degree angle, either above the prior brick (for an uptrend) or below it (for a downtrend). The chart adds new bricks only when the price completes the required move, disregarding specific time intervals This unique construction has some significant implications:

  • Trend Clarity: Renko charts excel in highlighting the underlying price trend. With time and minor fluctuations removed from the equation, it becomes easier to identify meaningful support and resistance levels.
  • Reduced Noise: Since Renko bricks only form after a specific price change, they filter out insignificant short-term fluctuations. This focus on larger moves can help traders spot trends that might be obscured by volatility in traditional charts.
  • Potential Entry/Exit Signals: As trends develop on Renko charts, the pattern of bricks can offer traders potential entry and exit signals. For example, a change of brick color (from white to black, or vice versa) following a trend can suggest a potential reversal or pause.

What is Renko?

Renko charts offer a unique and streamlined way to visualize price action within financial markets. Originating in Japan, the term “Renko” derives from the Japanese word “renga”, meaning brick. This name reflects how Renko charts are built. At their core, they consist of a series of uniform-sized bricks, each positioned at a 45-degree angle relative to the previous brick. Unlike traditional time-based charts like candlestick or bar charts, Renko focuses purely on price movement.

What is Renko

Renko bricks are formed only when the price of an asset moves by a predetermined amount, referred to as the “brick size.” This filtering of smaller price fluctuations is a core characteristic of Renko. An upwards brick is formed when the price exceeds the top of the previous brick by the brick size amount. Conversely, a downwards brick forms when the price drops below the bottom of the previous brick by the same value. Bricks alternate in color for easy identification of uptrends and downtrends.

While the exact origins of Renko charting are somewhat debated, the techniques have their roots in Japanese trading practices. The method’s simplicity likely led to organic usage over time. Renko didn’t gain widespread attention in the Western world until the 1990s, largely due to the writings of Steve Nison, who introduced them to a broader audience. With the advent of computerized charting, Renko has become a popular tool for technical traders seeking to isolate trends and reduce noise in their analysis.

How do Renko Charts work?

The key elements of Renko chart construction lie in the brick size and how the bricks are formed. The “brick size” is the most important parameter in Renko charting and represents the minimum price move required for a new brick to form. This directly influences the chart’s sensitivity to price changes. There are two common methods for determining brick size: a fixed value (e.g., 5 points) used consistently regardless of the asset, or an ATR-based approach where the brick size is calculated using a multiple of the Average True Range (ATR), an indicator measuring volatility. This dynamic approach adapts the brick size to the asset’s current price action.

How do Renko Charts work

Renko charts build bricks in a diagonal sequence based solely on price moves. If the price closes at least one full brick size above the top of the previous brick, the chart adds a new upward brick. Conversely, if the price closes a brick size below the bottom of the previous brick, the chart creates a new downward brick. Crucially, unlike traditional charts, Renko charts only add new bricks when the price completes the required movement, ignoring time intervals.

Let’s say you’re analyzing Apple (AAPL) stock with a fixed Renko brick size of $5. The first brick (usually white) would be placed at the opening price of $150. If AAPL rises to $155 or higher, the next brick would be placed above and to the right of the first, forming an upward step. If AAPL then drops to $145 or lower, a new brick (usually black) is placed below and to the right of the previous brick, forming a downward step. This process continues based on $5 price moves, with no new bricks forming for smaller fluctuations.

What Does Renko Charts Tell You?

Renko charts offer a streamlined, trend-focused way to analyze price action. By filtering out minor fluctuations and the time element of traditional charts, Renko can illuminate the underlying market dynamics. Here’s what they are especially good at highlighting:

  • Clear Trend Identification: Renko charts excel in visually defining trends. The series of angled bricks makes it easy to spot the prevailing trend direction, whether upwards, downwards, or consolidating sideways.
  • Support and Resistance: Due to their focus on price moves, Renko charts often reveal key support and resistance levels more clearly than traditional charts. These areas can provide clues about where the price might reverse or pause.
  • Potential Trading Signals: While not as diverse as candlestick patterns, Renko charts still offer trading signals. Changes in brick color after a strong trend can suggest potential reversals. Multiple bricks forming at the same level can reinforce support/resistance zones.

Renko charts are excellent for trend identification and filtering out noise, but they are not meant to replace traditional chart analysis entirely. Candlestick patterns, volume, and other technical indicators still play a crucial role. Renko can help confirm patterns and signals you see on other chart types.

Renko charts reflect these price bar concepts:

  • Upward Trend Bar: Represented by an upward (usually white) brick, signifying price movement exceeding the brick size.
  • Downward Trend Bar: Represented by a downward (usually black) brick, signifying price movement exceeding the brick size in the downward direction.
  • Neutral Bar: While not a distinct element on Renko charts, periods of sideways movement are reflected by a horizontal series of bricks, indicating little net directional change.
  • Inside Bar: Renko doesn’t explicitly show inside bars (where the high and low stay within the previous bar’s range). However, smaller bricks following a larger brick could be conceptually similar, suggesting narrowing price action.

What is the Renko Strategy?

A Renko trading strategy leverages the unique characteristics of Renko charts to identify trading opportunities. Renko strategies find applications in various trading scenarios, including intraday and swing trading. Let’s explore a simple Renko intraday trading strategy.

For this example, we’ll assume a Renko brick size of Rs.10, meaning a new brick forms only when the price moves up or down by that increment. To improve our signal confirmation, we’ll also incorporate the OBV (On Balance Volume) indicator, as Renko charts disregard volume data. OBV is a momentum indicator that helps visualize the flow of volume in and out of a security.

This combined Renko-OBV strategy focuses on identifying key support and resistance levels. A support level is a price where buying demand is strong enough to prevent further declines. Conversely, a resistance level is a price where selling pressure is strong enough to prevent further rises. Here’s how the setup works:

We look for instances where a new green Renko bar forms above a simple moving average (SMA) (shown as an arrow on a chart). This configuration suggests potential bullish momentum. Next, we look for a corresponding increase in the OBV reading, demonstrating rising volume alongside rising price. This increase in volume confirms buying pressure and strengthens the potential for a continued price move.

It’s essential to remember three key points:

  • Always set a stop-loss below your entry point to manage risk effectively.
  • Consider exiting the trade if the price closes below the SMA, suggesting a break in the bullish trend.
  • Aim for an initial profit target of at least three Renko bricks in the direction of the trade. At this point, you can switch to a trailing stop-loss to lock in profits.

What is the Renko Trading System?

The term “Renko Trading System” refers to a comprehensive trading approach that centers around Renko charts as the primary tool for analysis and signal generation. However, a true system goes beyond a single chart type. It encompasses additional elements to make it a well-defined and robust methodology. A typical Renko trading system usually includes several key components.

First, it involves a carefully considered Renko chart setup. This means selecting the appropriate brick size, which could be fixed or ATR-based, potentially customizing brick colors, and possibly incorporating a simple moving average as an additional trend filter. Next, a system has clear rules for when to enter and exit trades. This often involves looking for changes in brick color, breakouts above resistance or breakdowns below support, and potentially other Renko-specific patterns. Importantly, Renko systems rarely rely on Renko charts alone. Traders incorporate other technical indicators for confirmation. Popular choices include volume-based indicators (like OBV), momentum oscillators (RSI, MACD), or trend-following tools (moving averages). Finally, a good Renko system has clearly defined risk management strategies. This includes setting stop-losses, determining position sizes, and potentially having profit-taking guidelines.

What is Renko in MT4?

MT4 (MetaTrader 4) is a powerful trading platform primarily designed for traditional candlestick, bar, and line charts. It doesn’t have a built-in feature to create true Renko charts. However, traders can still access charting principles within MT4 through two main methods.

The first way is by utilizing custom indicators or scripts developed by the MT4 community. These specialized tools overlay a Renko-like representation on top of your standard price charts. While these indicators might have some visual or functional limitations compared to dedicated software, they allow you to leverage the core elements of trend identification and signal generation within the familiar MT4 environment.

The second method involves using offline Renko chart generators. These are specialized software or website tools where you specify the brick size and input the necessary price data to generate a Renko chart. You can then save the generated chart as an image and import it into MT4 for further analysis and overlay it with MT4’s built-in technical indicators. This method offers a more visually accurate Renko chart experience, but it involves additional steps outside of the MT4 platform itself.

What are the Advantages of the Renko Chart?

Renko charts offer traders a distinctive way to analyze and visualize market trends. Unlike traditional charting methods that get cluttered with time-based price fluctuations, Renko charts strip away this noise to focus purely on significant price movements. This unique approach brings several advantages to technical traders.

  • Trend Clarity: Renko charts excel in filtering out market noise and highlighting the underlying price trends. By stripping away the time element and focusing only on significant price movements, they offer a streamlined view of whether the market is in an uptrend, downtrend, or moving sideways. This clarity can be particularly valuable in choppy or volatile markets.
  • Visual Support & Resistance: Due to their structure, Renko charts often make identifying key support and resistance levels easier than traditional chart types. When multiple bricks stack horizontally, they visually reinforce potential areas where the price may reverse or find temporary equilibrium.
  • Reduced Analysis Time: Since bricks only form after a specific price move, they significantly reduce the number of visual elements on the chart. This simplification can save traders time in their technical analysis process by allowing them to quickly focus on what matters most – the direction and strength of the prevailing trend.
  • Potential Trading Signals: While not as diverse in patterns as candlestick charts, it still offers trading signals. Changes in brick color following a trend can suggest a potential reversal or pause. Breakouts above resistance or breakdowns below support zones can also act as entry or exit signals.
  • Complements Other Tools: Perhaps the biggest advantage is how Renko charts work in conjunction with traditional technical analysis. They offer a trend-focused view that can confirm or clarify signals seen on candlestick charts, volume indicators, or oscillators.

What are the Disadvantages of Renko Chart?

While Renko charts offer a streamlined way to analyze price trends, it’s important to be aware of their limitations. Understanding these potential drawbacks allows traders to make informed decisions about when and how to incorporate Renko into their overall trading strategy.

  • Loss of Time Information: Since Renko bricks are formed solely based on price changes, the time element is completely removed. This can be a disadvantage in certain situations. Traders lose the ability to see how long a price consolidation took or identify time-based chart patterns like flags, pennants, etc.
  • Lack of Detail: Renko’s focus on significant price moves means it doesn’t display the exact highs and lows within each brick period. This can obscure certain candlestick patterns that might be visible on a traditional chart, potentially leading to missed insights or signals.
  • Potential Lag: In fast-moving markets, bricks sometimes lag slightly behind the real-time price action due to the requirement of a completed price move for a new brick to form. This can make it more challenging for traders who rely on precise, split-second timing for their entries and exits.
  • Subjectivity in Brick Size: Choosing the “right” brick size is crucial for analysis, yet there’s no single perfect answer. Brick sizes that are too small lead to overly noisy charts, while large bricks obscure important price moves. Finding the right balance often involves trial and error.
  • Limited on their Own: Renko charts truly shine when used in conjunction with other technical analysis tools. Overreliance on chart alone can lead to missed signals or a skewed understanding of the overall market sentiment.

How Much Do Each Bar in Renk Chart Worth?

The value of each bar (brick) in a chart is determined by the brick size you select. The brick size represents the minimum price movement required for a new brick to form. It can be calculated using a fixed value (e.g., 5 points or $10) or dynamically based on the Average True Range (ATR) volatility indicator. For example, if your Renko chart uses a $5 brick size, each brick represents a $5 movement in the underlying asset’s price. An upward (usually white) brick means the price rose by at least $5, while a downward (usually black) brick means the price declined by at least $5.

What is an Example of Renko Chart?

Let’s consider Apple (AAPL) stock. We’ll create a Renko chart with a fixed brick size of $5. Here’s a simplified explanation of how bricks would form on the chart:

What is an Example of Renko Chart
  1. Initial Price: AAPL opens trading at $150. The first brick (usually white) is placed at this level.
  2. Upward Movement: If AAPL’s price rises to $155 or higher, a new white brick is placed above the initial one. This visually represents an upward price move of at least $5.
  3. Downward Movement: Conversely, if AAPL drops to $145 or lower, a new black brick is placed below the initial brick, signifying a downward price move of at least $5.
  4. No Change = No Brick: If AAPL trades between $145 and $155, no new bricks are formed. Renko charts ignore minor fluctuations.

Visual Example:

In this simplified example, the chart shows a series of upward bricks, visually demonstrating AAPL’s rising price. If at any point the price reverses and forms a downward brick, it might indicate a potential trend change.

What is the Best Indicator for Renko?

While there’s no single “best” indicator that complements the charts perfectly in all situations, several types of indicators work particularly well due to Renko’s focus on trend identification and filtering out noise. Trend-following indicators like moving averages (SMA or EMA) can confirm the direction suggested by the bricks. Volume-based indicators such as On-Balance Volume (OBV) or Chaikin Money Flow add another dimension to Renko analysis. Finally, oscillators like RSI or the Stochastic Oscillator can help identify potential overbought or oversold areas within the trend established by the Renko chart. Ultimately, the best indicator for your needs will depend on your trading style, risk tolerance, and the specific asset you’re trading, so consider backtesting different indicator combinations with Renko on historical data to find optimal setups.

Do Professional Traders Use Renko Chart?

Yes, some professional traders use Renko charts. While they might not be the primary tool for everyone, Renko’s ability to filter out noise and highlight trends with clarity offers value to many professionals. It often serves as a valuable supplement to traditional charts and indicators, especially in volatile markets. Some professionals implement specific trading strategies, focusing on trends, breakouts, and unique indicator combinations.

Is Renko Best for Scalping?

Yes, Renko charts are often favored by scalpers for their ability to filter out market noise and focus solely on price movements. Renko charts plot price movements in the form of bricks, with each brick representing a predetermined price movement rather than time. This feature makes Renko charts particularly suitable for scalping, where traders aim to capitalize on short-term price fluctuations. By eliminating the minor price fluctuations seen in traditional time-based.

Is 50 PIP Fixed per Bar in Renko?

Yes, the PIP value per brick in Renko charts is fixed. You determine this value when setting up the chart. For instance, if you choose a 50 PIP chart setting, each brick will represent a price movement of 50 PIPs.

However, it’s important to understand that not every bar you see on a Renko chart will visually represent the full 50 PIP movement (or whatever value you chose). A new brick only forms when the price completes the full PIP requirement in a single direction. If the price moves close to the required PIP value and then reverses, no new brick will appear. Additionally, if the price continues to move in the same direction by at least another increment of your chosen PIP value, multiple bricks can form consecutively.

Is Renko Good for Highlighting Trends?

Yes, Renko charts excel at highlighting trends. Their core design principle is to filter out minor price fluctuations, known as “noise”. This filtering visually simplifies the chart, making it much easier to identify the underlying price trend – whether it’s an uptrend, downtrend, or sideways movement.

Because Renko bricks only form when significant price movement occurs, the charts inherently emphasize the prevailing direction of the market. Renko charts clarify trend identification and reduce the likelihood of being misled by small, insignificant price changes that often occur in other charting styles.

Can Renko be Used as a trailing stop-loss​​?

Yes, Renko charts can be used to implement trailing stop-loss strategies. One common method involves placing your stop-loss a certain number of bricks below the most recent high (in a long position) or above the most recent low (in a short position). This allows your stop-loss to dynamically adjust as the trend continues and new bricks form. Another option is to use Renko charts with technical indicators to set trailing stop-losses. For example, you could trail your stop-loss a few pips below a moving average line.

It’s important to note that due to Renko’s structure, a traditional PIP-based trailing stop-loss might not always be the most effective approach. This is because price action can fluctuate within a Renko brick without triggering a new formation, potentially leading to your stop-loss being triggered unnecessarily.

What is the Difference between Renko from Heikin Ashi Chart?

While both Renko and Heikin Ashi charts originated in Japan and aim to reduce market noise for easier trend analysis, they have key differences in how they are constructed and the way they should be interpreted. Renko charts place absolute focus on price; a new brick only forms when the price moves by a set amount (e.g., 10 pips). Conversely, Heikin Ashi charts smooth out price action by using an averaging formula that incorporates data from both the current and previous periods, including their open, high, low, and close prices.

Visually, Renko charts look like a series of bricks stacked at 45-degree angles, which emphasizes reversals in price. Heikin Ashi charts have a more traditional candlestick appearance, but due to the calculated values used, they provide a smoother representation of trends. Because of these differences, Renko charts excel at defining price breakouts and signaling changes in market direction, while Heikin Ashi charts offer a clearer visual representation of the overall trend and can be helpful in identifying potential trend continuation patterns.