Renko Charts

In financial markets, most traders prefer using candlestick charts as they show even the tiniest price changes over time. Also, they show both price and time which gives a detailed view of market movements. However, there's another type of chart that doesn't consider time at all, known as Renko charts.
 

Recently, Renko charts have become very popular among online stock traders due to their simplicity and effectiveness. As one of their major features, these charts focus only on price movement and ignore time. This makes it easier to spot trends and find potential points for entering or exiting trades.
 

Furthermore, these charts help traders make clearer and more straightforward decisions based solely on price changes. Let’s understand Renko charts in detail and see how you can practically use them while trading. Also, we will compare Renko charts with other popular charts to offer you a complete comparative view.

A Renko chart is a type of chart used in technical analysis. Unlike traditional charts that display price changes over specific periods, Renko charts focus solely on price changes. These charts are made by drawing boxes (also called bricks) of a fixed size that represent price movement. Usually, each brick is drawn in the direction of the price movement, and traders can decide the size of each brick.

Renko charts can also be customised using different brick sizes depending on the security's volatility. For example,

• For highly volatile securities, larger brick sizes might be more suitable
• On the other hand, smaller brick sizes might be better for low-volatility securities

One of the main benefits of Renko charts is their simplicity and ease of use. They provide a clear view of price movements, which makes it easier for traders to:

• Spot trends
  and
• Identify potential entry and exit points

This clarity also helps in filtering out the "noise" or insignificant price fluctuations, which usually create false signals. By only showing price movements that are equal to or greater than the brick size, Renko charts:

• Eliminate minor price changes
  and
• Reduce the chances of misleading information

Using Renko charts, traders can focus on more substantial trends and make better trading decisions. For more clarity, let’s have a look at some major benefits of Renko:

• Renko charts filter out minor price movements. This makes it easier to focus on significant trends.
• These charts highlight clear trends. This clarity helps traders quickly identify the direction of the market.
• By focusing on price movements of a certain size, Renko removes the effects of market volatility.
• These charts work well for identifying and following trends. This feature makes them particularly helpful for trend-based trading strategies.
   

As one of the major disadvantages, Renko charts do not show specific time intervals. This is a big drawback for traders who need time-based data. Furthermore,

• Renko ignores small price movements. This leads to missing some potential trading opportunities.
• Since they are based on price movements, Renko charts do not provide as much historical data as time-based charts.
• Sometimes the creation of a new brick lags behind real-time price changes. This causes potential delays in trade decisions.
• Renko charts ignore small price changes. This makes them less suitable for scalping, which relies on quick trades.

Candlestick chart patterns simplified for everyday traders

Most traders find Renko charts easy to read. By correctly interpreting the various signals generated by Renko, they can easily identify potential opportunities in the market. Now, let’s learn how you can practically apply Renko charts following these three easy steps:

• Step 1: Determine the brick size
  • The first thing you need to do is decide on the brick size.
  • For those unaware, the brick size is the minimum price change needed to draw a new brick on the chart.
  • For example,
    • Say you set the brick size to 10 pips in forex.
    • Now, a new brick will be drawn only when the price moves up or down by at least 10 pips.
  • Please note that the size of the brick depends on your trading style and the type of asset you are trading.
  • Larger brick sizes will show fewer bricks and will make it easier to spot trends.
  • On the other hand, smaller brick sizes will show more bricks and will offer more trading opportunities.
• Step 2: Identify trend
  • After setting the brick size, the next step is to identify trends.
  • Renko charts help identify trends easily by eliminating minor price fluctuations.
  • To spot a trend, look for a series of consecutive bricks that are either all bullish (green) or all bearish (red).
  • Remember that a series of bullish bricks indicates an upward trend, while a series of bearish bricks indicates a downward trend.
• Step 3: Look for trading opportunities
  • The final step is to find trading opportunities.
  • One popular method of doing so is to look for price reversals.
  • These reversals usually happen when the price starts moving in the opposite direction of the current trend. For example, say the trend is upward, but the price starts to move downward.
  • Another method is to look for support and resistance levels.
  • For those unaware, these are key levels where the price tends to bounce or reverse.
  • Most traders use these levels to determine entry and exit points for their trades.

As mentioned above, Renko charts are customisable. You can set up your Renko charts in a way that best suits your trading style and strategy. Let’s see how:

• Choose an appropriate brick size
  Select a brick size that matches the asset or security you are trading. For assets with high volatility (large price swings), a larger brick size is more suitable. This helps to filter out noise and show clearer trends. Whereas, for assets with low volatility (small price movements), prefer choosing a smaller brick size. This will help you get more details and trading opportunities.
• Select a suitable time frame
  Select a time frame that aligns with your trading style. It must be noted that Renko charts are versatile and can be applied to any time frame. However, in most cases, prefer selecting from these common time frames: 5 minutes, 15 minutes, and 30 minutes.
  Furthermore, be aware that shorter time frames, like 5 minutes, are good for quick trades, while longer time frames, like 30 minutes, are better for observing longer trends.
• Use multiple time frames for confirmation
  To make more confident trading decisions, use multiple time frames to confirm your trades. For example, if you usually trade using a 15-minute Renko chart, you can also check the 5-minute and 30-minute Renko charts to confirm your trade signals.
  Such usage of multiple time frames ensures that the trend you are seeing is consistent across different time frames.

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Renko charts can be compared with Kagi charts and Point & Figure (P&F) charts. Such a comparison can help you choose the best chart type for your trading strategy, depending on:

• Whether you focus on short-term or long-term trends?
  and
• How much detail do you need on price movements?
   

Let’s read the table below:

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It is pertinent to note that Renko charts are helpful but not foolproof. They can be a powerful tool for spotting trends and finding trading opportunities. However, they are not perfect and shouldn't be relied on alone. Thus, to make better trading decisions, use Renko charts along with other indicators like

• Relative Strength Index (RSI)
• Anchored Volume Weighted Average Price (AVWAP)
• Moving Average Convergence Divergence (MACD)
• Bollinger Bands, and more
  
  

Such a combination helps confirm trade signals and reduces the risk of making decisions based on false signals. For a better usage of Renko, let’s check out some other proven trading tips:

• Use trailing stop-loss orders
  Trailing stop-loss orders automatically sell your trade if the price reaches a certain level. This helps manage risk by limiting losses if the trade moves in the opposite direction.
• Use multiple time frames
  Confirm your trades by looking at Renko charts across different time frames.
  For example, if you see a signal on a 15-minute chart, check the 5-minute and 30-minute charts to make sure the trend is consistent.

Renko charts are technical analysis tools that focus solely on price movements. They filter out minor fluctuations and make it easier to identify trends and potential trading opportunities. These charts use fixed-size bricks, which provide a clear view of the market.
 

However, Renko charts should not be used alone. You should prefer combining them with other indicators like MACD, Bollinger Bands, AVWAP, RSI, etc. Such combined usage can better confirm trade signals and reduce the risk of false signals. For effective trading, it is also recommended to use multiple time frames and trailing stop-loss orders. Also, fundamental analysis can help you identify stocks that can build wealth.
 

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