What is a Renko Charts: Meaning, Interpretation, Benefits and More

In this article, we will discuss

Traders in the securities market focus primarily on price trends over different time frames ranging from one minute to one year. These trends, however, are not easy to decipher. In an overarching bullish trend, you may find many smaller bearish trends where the price falls to a minor degree. Such short-term fluctuations can make it difficult to assess what the broader trend is.

Renko charts make this easier. Instead of focusing on how the price moves over each unit of time chosen, these charts only focus on how the price moves. As a result, the regular noise of minor price movements is filtered out and you get to see what the major price trend is.

In this article, we will examine what Renko charts are, how they are plotted and how you can use these chart patterns to implement strategies for your trades.

What is a Renko Chart?

A Renko chart is a type of Japanese price chart that aims to display the actual price action by eliminating minor price movements and associated noise. Each price movement is represented by a brick that focuses entirely on the price change alone. The Japanese term for bricks is renga, which is where the chart derives its name from.

In a Renko brick chart, a new brick is formed whenever the price moves upward or downward by a specified amount. This is in sharp contrast to traditional candlestick price charts, where a new candlestick is formed for each new predefined period.

Decoding Renko Bricks

To create a Renko brick chart, you need to first choose the box size — which is essentially the size of the price changes that will be reflected in the chart. For example, say a stock is currently trading at Rs. 500 and you choose a box size of Rs. 10. This means that a new brick will only be created when the price rises or falls by Rs. 10 or more.

Each new brick is created at a 45-degree angle to the previous brick and may be represented in green (or white) to signify an upward price change or red (or black) to indicate a downward price movement.

So, for instance, say the price of the stock in our example moves from Rs. 500 to Rs. 507. In this case, no new brick will be formed because the amount of price change is less than the box size of Rs. 10. However, if the price then rises to Rs. 511, for instance, a new green box will be formed at a 45-degree angle above the previous box.

Since bricks can only form at this angle and cannot be placed next to one another, the price has to move twice the box size at least for a new brick to form in the opposite direction. Let us continue our example to illustrate how this works.

Say the price falls from Rs. 511 to Rs. 500 again. Technically, this move represents a price change larger than the box size, so it should be plotted on the chart. However, plotting this change means that the new brick will overlap with the previous brick. So, no new brick will be created yet. It is only when the price falls by Rs. 20 or more, to Rs. 490 or lower, that a new red brick is formed.

The Role of Time Frames in Renko Brick Charts

You’ve seen how bricks are formed in the Renko chart pattern. Each brick only represents a change in price by a specified minimum amount. This price change may occur over different time frames. For instance, if the price of a stock or security is highly volatile, you may find that several new bricks are formed within a short period. However, in a stable market environment, it may take much longer for the price to move up or fall by the box size, leaving you with fewer bricks over a similar period.

That said, although the time frame is irrelevant to the formation of a new brick, it still plays a crucial role in determining the price points that will be plotted on a Renko brick chart. These price points are typically the closing prices for each trading period. So, you need to choose a suitable time frame based on your trading goals, and the closing prices will be chosen and plotted accordingly.

For instance, say you choose to use a daily time frame. Your Renko chart will be created based on the closing prices of each trading day. When the closing price rises or falls by the box size or higher, a new brick will be formed as discussed in the previous section.

A Step-by-Step Guide to Using Renko Charts

To use these charts effectively for your trades, you need to know how to choose the best Renko chart settings for your goals and how to interpret what you see on the chart. Here is a step-by-step guide to help you with this.

  • Step 1: Identify a Suitable Time Frame

The first step to using these charts is to know the time frame over which you wish to trade. If you want to capitalise on short-term price movements, you will have to choose shorter time frames like one hour or one day. Otherwise, you could opt for longer periods like one week.

  • Step 2: Choose a Suitable Box Size

The box size depends on the time frame chosen. Shorter time frames typically warrant lower box sizes because the price changes will be minimal on an hour-by-hour or minute-by-minute basis. However, for longer time frames, higher box sizes may be ideal.

The box size can be set as a fixed amount or as a percentage of the current price. The latter helps plot price changes more smoothly. For instance, you could choose a box size of 0.5% to 1% of the price for intraday trades and 5% of the price for weekly trading time frames.

  • Step 3: Study the Direction of the Bricks

Once you have chosen the best Renko chart settings for your requirements, you can study the chart to assess how new bricks form. Typically, a continuous series of green bricks is formed when the stock price is on an uptrend. Conversely, a series of red bricks indicates a downward price trend.

  • Step 4: Look for Possible Trend Reversals

You may also notice that at specific points on the Renko brick chart, a green brick may be followed by a red brick (or vice versa). If the green brick is at the end of a strong uptrend and the red brick is followed by more similar boxes, you may be looking at a bearish reversal.

The opposite may indicate a possible bullish reversal instead. You can (and should) look at other technical indicators like moving averages, RSI and MACD, among others, to confirm the reversal before making trades based on this change.

  • Step 5: Check for Support and Resistance Levels

When the green bricks indicating an uptrend repeatedly hit a specific level before reversing into red bricks, you may be looking at a possibly strong resistance level. Similarly, when the red bricks indicating a downtrend seem to hit the same or similar level before reversing upward into green bricks, that may be a potentially strong support level.

Renko Trading Strategies

Now that you know how to read and use these brick charts, you may be curious about how the interpretation can help you formulate Renko trading strategies. Here are some strategies that you can rely on.

  • Trend Trading

The bricks on the chart can give you a clear picture of the direction of the overall trend, making trend trading one of the easiest strategies to try. If you notice that the chart shows a series of green bricks, it means the current trend could be strongly bullish. You can take a long position to capitalise on this upward momentum. Conversely, if you see a series of red bricks, you could choose to go short to leverage the prevailing bearish trend.

  • Range Trading

When the price fluctuates between two extremes but does not break out of these ranges, you may be looking at a phase of price consolidation. Such sideways market phases may present several opportunities for range trading, where you focus on the prevailing support and resistance levels and attempt to capitalise on price changes between these two extremes.

  • Breakout Trading

Sideways markets do not last forever. At some point, the price will likely break out above the resistance level or fall below the support level — depending on whether the buying pressure or the selling pressure dominates the market. You can use a combination of Renko brick charts and other technical indicators to identify when the price may break out of either of these levels and place your trades accordingly.

Advantages of Renko Brick Charts

A Renko brick chart offers many benefits to traders. Here is a closer look at why it can be advantageous to traders in many ways:

  • Simplifies price trend analysis
  • Filters out minor price fluctuations
  • Clarifies support and resistance levels
  • Makes trend identification easier
  • Suitable for medium-term and long-term trades
  • Useful in volatile markets

Limitations of Renko Brick Charts

This type of Japanese price chart also has some limitations, as outlined below.

  • Ignores time element
  • May offer delayed signals
  • Eliminates minor trends
  • Could generate false signals
  • Oversimplifies price movements

Conclusion

The bottom line is that Renko brick charts can be a fine addition to your technical analysis tools as they filter out the noise and smoothen out price movements. If you keep the limitations in mind and focus on tapping into the benefits instead, you can understand the market better and spot trading opportunities more easily.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847

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