Charts have always been an essential element for technical analysis. Traders use charts to organize data, extract meaningful information, and make effective trading decisions. Furthermore, dedicating effort to creating clean and easy-to-read charts may help you gain situational awareness and industry insight. Not to mention, colors, layout, typefaces, indicators, and overlays should all be carefully chosen while designing a chart. Today, we’ll discuss Renko Charts in detail.
What Is Renko Chart?
Renko is a type of chart that helps traders filter out small price movements and focus on more significant trends. Renko bricks create these charts after a price moves by a specific value. When a price of an underlying security rises, Renko bricks turn green while they turn red if the price falls. Hence, it becomes easy for traders to determine the price direction. Renko charts are known to be extremely useful in trading trends.
History of Renko Charts
Rice traders created brick charts hundreds of years ago. Instead of recording each price change, the merchants devised a technique to record only significant adjustments. Wisely, they saved time and resources.
The Japanese term Renko means both “brick” and “calm road”. A seamless model price change model with no sudden small movements is the essence of these charts. Traders were creating Renko charts manually on paper. Thanks to modern computing technologies that help traders create them automatically or with minimum manual input requirement.
Renko appeared for the first time in Steve Nison’s book titled “Beyond Candlesticks”. The financial expert detailed the fundamental Renko methods that many traders still utilize while trading Forex.
How Does Renko Chart Work?
Renko charts comprise bricks that move up or down at a 45-degree angle. While the bricks never face each other, traders select the chart’s brick size, and the time for new bricks is determined consequently.
Let’s examine the chart below for the Euro 50 Index to make it more simple to understand. A 35-brick size signifies that the price must move 35 points from the previous brick’s closing price to build new brick in the following direction. Since bricks cannot form next to each other, the price must move 70 points opposite to make a brick. The bricks in this example only emphasize 35-point advances. Notably, price moves of less than 35 points do not form new blocks.
The chart’s timescale is set as D1. So fresh new bricks for the Renko chart will only develop based on the day’s closing price. The price must drop 35 pips below the preceding red brick’s bottom to form another red brick. Because this is a daily time frame, the price might drop 50 points below that level, but no new brick is drawn if it closes fewer than 35 pips beneath the previous red brick.
Traders can change the timescale to anything from a second to a month. Choosing a minute chart means bricks are formed based on the minute’s closing price. Renko charts display price data for currencies, commodities, stocks, indexes, ETFs, and Treasury bills.
Develop an understanding of Renko Charts
Since Renko charts exclude minor price changes, they can effectively identify trends, and even traders can use them as a trailing stop-loss.
For example, the chart above indicates a prolonged upswing from mid-May to early June. Not to mention, the Renko chart never reversed. A trader maintaining this position might have made 385 points (11 x 35) before the appearance of the first red brick, signaling an exit as the downturn had begun.
Then came a prolonged fall in October, possibly signaling traders to short holdings and avoid purchasing. Also, traders who held long positions through green bricks saw steady returns.
But there is a downside as well. Between June and October, the Renko chart looks a bit messy. Trying to purchase or sell based on color or direction changes within this period could end up traders in frustration and financial loss. Therefore, it is always best to use Renko charts in conjunction with price action research and other trading systems rather than employing them individually.
A little about Renko Bars
Renko bricks are sometimes also known as bars or blocks. The name bar stems from bar charts, representing a period like a candlestick chart.
For instance, each bar represents 50 pips in the EUR/USD currency pair, as shown in the example below. We’ve also marked indicators of turbulence and trend reversals.
Comparison of Renko Charts with Other Indicators & Charts
Heikin Ashi Charts VS Renko Charts
Heikin Ashi chart averages recent price moves, whereas the Renko chart emphasizes the overall trend. This candlestick chart uses preceding candle values to provide a smoother average price than standard candlesticks.
The screenshot below displays the differences between them. While the left $1.50 Renko brick illustrates price activity for five months, the Heikin-Ashi chart presents price actions for crude oil for five months.
Candlestick Charts VS Renko Charts
Unlike Renko charts, Candlestick charts concentrate on timing and price information. A new candlestick develops after each specific interval, regardless of the price movement. Assuming at least one transaction in a trading day, a candle forms reflecting the day’s high, low, close, and open prices, as seen below.
On the other hand, Renko charts do not construct a new brick showing the daily high, low, closing, and opening points after every time lapse. Instead, it only produces a new brick after meeting the minimum movement threshold.
Given below are two cotton contracts shown in the graph. The chart on the left utilizes 1.00 Renko bricks, while the one on the right uses daily candlesticks.
How to trade using Renko Charts
Since clients can employ Renko Charts in different trading strategies, let’s go through a few of them below.
Charting Patterns
Renko chart patterns are comparable to candlestick chart patterns due to similar heads, shoulders, rounded tops/bottoms, triangles, etc. Unlike a candlestick chart, a Renko chart has fewer price changes, making such patterns simpler to notice. You can use different chart pattern scanners to recognize these chart patterns conveniently.
Renko trailing stops
Renko charts can assist traders in riding out a trend until a significant reversal occurs. Long-term trends can result in big gains.
Resistance & Supports
Renko charts assist traders in spotting resistance and support levels that a candlestick or bar chart may not show. A strong resistance level or support zone is indicated by Renko charts turning lower or higher. Traders might take short bets around resistance or purchase near support. In this region, keeping an eye on breakouts in the Renko charts might signal the beginning of a new trend.
Scalping using Renko Charts
A scalping strategy seeks to benefit from minor price swings multiple times a day. Renko charts can show broad trend direction, but they may not always be accurate because the bricks don’t refresh like candlesticks. Hence, using Renko charts for scalping might not be optimal for this method.
However, scalpers might arrange Renko bricks to develop in 30-minute increments or less. However, to emphasize tiny trends and reversals appropriate for scalping, traders can use the Renko charts.
Swing Trading Using Renko Charts
Renko charts can assist swing traders in capturing trends and holding positions until a significant reversal occurs. For example, while the price rises, the Renko chart creates green bricks until a specific size reversal. That’s how swing traders can predict the size of the price reversal. When it happens, they might choose to exit their long positions.
Indicators such as Renko or candlestick charts might operate as trading triggers. Swing traders can also take short positions when the price is stalled at resistance and hold them until the price declines to support or the Renko chart reverses. Not to mention, a comparative approach would be to go long near support.
Renko Chart Limitations
Due to their lack of emphasis on time, Renko charts lack detail. A stock that has ranged for a long time might produce a single box, not telling the entire story. Renko charts may help some traders in such a scenario, but others are likely to suffer.
Renko charts often ignore highs or lows and consider closing prices only. Hence, it omits a lot of pricing data because prices for highs/lows could differ significantly. Although closing prices help traders reduce noise, it can dramatically reduce the price before a new box emerges and warns the trader. By then, avoiding a loss might become too late. Therefore, traders employing Renko charts commonly use stop loss to predetermined levels rather than relying on Renko signals only.
In Renko Charts, sometimes a whipsaw effect occurs, leading to false information, especially when the bricks start changing colors too early due to the chart’s design. That’s why it’s best to use Renko charts as a confluence along with other technical indicators/confirmation signals for the trade setups based on your trading plan.
How to set up Renko Charts on MT4?
MetaTrader 4 (MT4) platform doesn’t come with a built-in feature of Renko Charts. However, customers may download it as third-party tools and indicators. There are multiple Renko chart indicators in MT4’s “CodeBase” tab. You may choose to display the Renko chart as an indication downside of the charting area.
Trading on MT4 with third-party software is risky since the writer’s market knowledge, and coding competence needs to be factored in. It is better to download it from the community website www.mql4.com. (For mt5 check out, www.mql5.com)Furthermore, Renko chart indicators also come with unique setup requirements.
Pros and Cons of Renko Charts
If you employ Renko charts instead of typical bars, you are likely to find them incredibly useful for price analysis. But these charts also have a few demerits of using them. Let’s have a quick look at both pros and cons of Renko Charts below.
Pros
1. It becomes pretty easy to determine the market’s trend and trade routes using Renko charts.
2. Renko charts are easy to interpret since the change in color of a chart brick indicates sell or buy.
3. Renko chars are ideal for trading resistance and support regions (including breakouts).
4. Renko charts deliver more vital trading indications than Japanese candlestick charts without evaluating volumes.
5. Renko charts come with easy recognition of visual patterns and generate quality signals.
Cons
1. Smoothing reduces both market noise and helpful volatility. As a result, trading only bricks causes issues with leading signal interpretation.
2. The bricks indicate lagging patterns. Each time the latency varies. It is evident during consolidation.
3. It is not feasible to employ indicators directly linked to trade volume and time scale.
Conclusion
Losing trades is part of a trader’s life irrespective of the strategy or chart type. However, traders can always control the risk exposure and how much money they are willing to lose on failing trades. Therefore, adding a stop loss to your trades will be of tremendous significance in managing your risk.
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Frequently Asked Questions – (FAQs)
What time scale works best for the Renko chart?
There is no specific time for incorporating Renko charts. Instead, you can use them on any time scale. However, short periods benefit the most from these tools since the market noise is typically higher than daily or weekly time frames.
How to calculate Renko Chart?
New bricks emerge when the price moves by more than the size of a brick, as set by the trader or the ATR indicator connected. The chart’s susceptibility to market noise varies depending on brick size.
What are the best indicators that investors should use in conjunction with the Renko indicator?
Renko bricks work nicely with all price movement indicators that ignore trade volume, including Bollinger Bands, RSI, MACD, etc.
How to pick the size of a Renko box?
The appropriate brick size is chosen manually or using ATR based on the asset’s current value. In the latter situation, the market volatility determines the size of a Renko box.
How can I trade Renko charts successfully?
Trend techniques work best when paired with additional indicators and chart pattern analysis. Clients usually trade Renko charts with Japanese candlesticks, called Heiken Ashi.
How does Renko bar work?
The bricks indicate the change in price without volatility. That’s how spotting the pattern becomes much more manageable. Since the bricks are not time-restricted, one brick might be drawn for minutes or days, depending on its size and market activity.
Where can I find the Renko chart in MT4?
Unfortunately, the Renko indicator isn’t a default feature in MT4. But you can get it from third-party resources. You can also find upgraded indicators that indicate bricks as transparent rectangles or even colorful lines.