What is Renko Chart: Trading Strategies, and Advantages

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What is Renko Chart

Renko charts are the most underappreciated and beneficial tool market participants can use in technical analysis. Renko charts have their roots in Japan and are unique from most traders' candlestick and bar charts. Unlike other charting tools that use time to measure price movement, Renko bricks are built exclusively on price movement. A brick in a Renko chart equals a set price variation, and building charts on this principle serves as a noise filter and makes market trends more evident. Let's dive into the article to know more about it.

What is the Renko Chart?

Renko Chart is a type of chart used in technical analysis that eliminates minor price movements and only shows actual price action. While conventional charts such as candlestick charts or bar charts illustrate changes in price over time, the Renko Chart displays the progression of the price changes in a series of bricks, each representing a specific price. The bricks are green when the price is moving up and red when moving down, making this chart obvious and a lovely pattern.

How does the Renko Chart work?

The mechanics behind Renko Charts are pretty simple. It would be if you decided on the “brick size,” you represent the minimum price movement required to form a new brick. 

For example, if you set the “brick size” to ₹10 for a stock that trades at ₹500, a new green brick will only form when the price moves to ₹10 or more above ₹500 to ₹510, and a new red one will form when the price has fallen below ₹10 or greater below the closing trade at ₹500 to ₹490. 

Picture the price movements with the help of added or removed bricks. Another brick stone emerges each time the price shifts abruptly enough to warrant a desktop’s creation. Any new brick stone denotes a price change in a new direction. It continues for as long as the price moves consistently in that direction before a new brick appears. This act rectifies insignificant price fluctuations to highlight the significant moves, which could indicate a potential reversal or continuation. 

What are the Advantages of Renko Chart? 

  • Trend Identification: Renko Charts are effective in identifying and presenting trends. The formation of the bricks couples in one way; colour implies the momentum and resilience of the trend. This feature aids traders in identifying potential entry and exit points. 
  • Noise Reduction: The Renko Charts filter out cases of insignificant price movements and reduce market noise. Hence, traders are presented with cleaner-only price actions, enabling traders who prefer large price movements to experience them without the distraction of minimal fluctuations. 
  • Versatility: The Renko charts can be used in every financial instrument. It is not limited to currencies, stocks, commodities and indices.
  • Visual Clarity: The triangle structure of the Renko makes it appealing and inclusive when identifying price behaviour. The green and red alternation in bricks allows traders to quickly determine support and resistance levels and forecast a trend reversal. 

How to Use Renko Charts for Trading?

Setting brick size

The size of the rectangle determines how much price one should pay to create a new brick. A large brick size eliminates more noise, while a small one indicates greater price movement sensitivity.

Entry and Exit Signals

Renko charts can identify potential entry and exit signals for trades. Some standard signals include: 

  • The formation of new upward or downward-trending bricks after a consolidation period
  • Price breaking out from a consolidation pattern
  • Divergences between the price action and momentum indicators 

Renko Chart Patterns

Like candlestick charts, Renko charts can also exhibit recognisable chart patterns that may signal a potential trend reversal or continuation. Some examples include: 

  • Renko rectangles (consolidation patterns)
  • Renko triangles
  • Renko wedges
  • Renko triple tops/bottoms 

Traders can use these patterns with other technical indicators and analysis techniques in these dividend-paying penny stocks.

Conclusion

Renko Charts give you a unique and powerful insight into market dynamics, which can ensure that traders and Investors can avoid most of the market noise and pay attention to significant price movements. Whether you are a market veteran or a newbie, learning Renko Chart analysis could give you an edge in covering your way around changing financial business environments.

  • Can Renko Charts be suitable for intraday trading?

  • How do I know the optimal brick size with a Renko Chart?

  • What is the best way to choose the right brick size for the Renko Chart?

  • Can Renko Charts be combined with other technical indicators?

  • Are there any disadvantages of Renko Charts?

  • Can Renko Charts be suitable for swing trading?

  • Are Renko Charts similar or different from other chart types in candlestick charts?

  • Renko vs Heiken Ashi.

  • Are there any specific patterns or formations in Renko Charts?

  • Can Renko Charts analyse different time frames?

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