Renko Charts explained
Renko charts are concerned with price movement and time is of lesser importance; it is only noted when a new brick is created. On the other hand, line/bar/candlestick charts have a constant date axis, with each data point joined to a distinct timestamp.
The price change is represented by bricks that are either green, implying an increase in price, or red, implying a price decrease. To create a new brick on the chart, the price must rise or fall by at least a certain brick size (specific price amount) and it must maintain this price at a close - this rule eliminates little price fluctuations from the chart, allowing for a clearer view of an overall trend.
Basic rules of Renko charts:
- A new brick appears always at the top or bottom right corner of the preceding brick
- Consecutive bricks are never drawn next to each other
- There can only be one brick in each vertical column
- The lower the brick size, the more detailed price movement will be recorded
For example, a trader establishes a brick size of $0.50. For a new brick to be plotted, the price must go up or down by $0.50 or more and close at or above this level. If the price is at $25.00 and climbs higher and closes at $25.50, a new green brick is drawn. If the price rises to $25.75 before closing, it won't appear on the chart since a brick would be drawn only corresponding to the price movement of $25.00 to $25.50 and not the higher level of $25.75 because it is less than the brick size, which in this case is $0.50. The same logic applies when the price drops except for a price reversal. If the price falls back from $25.50 to $25.00, a new red brick will not be drawn since subsequent bricks cannot be placed next to each other, hence the first red brick may be plotted when the price drops to $24.50 or below.
In addition, a drop or rise of $0.50 might take any length of time; 1 minute, 3 hours, weeks, etc. If this was the case, no new brick would be created until then, illustrating the point previously made that Renko charts are not fixed to precise time frames like other charts are.
The size of a brick is determined using two methods: an average true range (ATR) or a trader-chosen arbitrary price amount. The first type is a technical indicator that calculates the mean price movement, resulting in a more accurate brick size and reducing noise. Furthermore, this measurement adjusts throughout the day, which might alter how the chart appears. When using the second approach, determining a suitable size for each instrument may be tough, and some trial and error with the brick size may be necessary.
Last but not least, Renko charts provide a quick method to spot fundamental support and resistance levels as well as trends that correspond with them due to their distinct characteristics outlined and explained in this article. However, it is not advised to use them as the only source of decision-making because other types of charts and technical indicators can provide necessary additional insights to develop a successful trading strategy.