What is Renko Chart?
Renko chart represents a chart formed by bricks (blocks) that only measure price movement. Each time the rates fluctuate for a particular number, another brick is added, every single block is adjusted at 45° (upward or downward) about the previous one.
A chart made by the Japanese, with the help of rate fluctuations instead of rates and standard timing, unlike other charts, is stated as Renko Chart. As per its appearance, like a sequence of bricks, the chart is titled from the word “renga,” which means brick in Japanese. Each time the rates fluctuate for a particular number, another brick is added, every single block is adjusted at 45° (upward or downward) about the previous one. We can differentiate the upward and downward bricks by their colors. They are colored white/green and Black/red, respectively.
What is candlestick brick?
Renko charts use price “bricks” instead of common candlesticks that represent a fixed price move. For example, if the brick value is set to 20 points, a move of 20 points or more is required to draw another brick.
Renko chart vs. candlestick
The difference between the candlestick and Renko charts is that the candlestick chart shows the last price while a Renko chart shows the price that created the last brick. Thus, Renko charts do not show exactly the high or exactly low of an asset.
How do Renko charts work?
- A Renko chart is made of blocks (bricks), adjusted at a 45° angle about the other one.
- The value of a block can be of any range, like $0.10, $0.50, $5, and further. It is known as box size. The size of a box can also depend upon ATR (Average True Range).
- A Renko chart consists of specific durations, yet a duration cycle is not locked. The formation of a few bricks can take more time compared to others. It depends on the time consumed by rates to reach a specific level.
- A Renko chart proves to be helpful to dealers, as it refines noise and specifies the direction as all narrow activities are refined and executed.
- A Renko chart always prefers closing prices, depending upon the duration cycle being selected. For example, if you utilize a week-based duration cycle, closing rates will be chosen per the weekly duration cycle.
Formation of Renko charts is done to eliminate minor rate differences and make it simpler for dealers to concentrate on significant deals. As a result, it becomes simpler to figure out directions, but there is one downfall: it also clears few pricing data because of simple block formation.
An initiative towards the formation of Renko charts is to select a box size that indicates the significant rate of activities. For example, if an asset has a $0.25 block size, a coin might have a 50 pip block size. Then a Renko chart is formed by adjusting blocks in the next column as the value has passed the leading or last of a block before the size of the case.
In the case of an asset, let’s consider a share traded at $10, and its block size is $0.25. Now, in case its value goes up to $10.25, the latest brick would be made. Another will be formed only when the weight gets put at $10.25 or greater. Even If its value hits up to $10.24, a renga will not be created. As brick is formed, it can’t be erased further. Later on, if its value goes up to $10.50 or greater and closes, one more brick will be formed.
Rengas are not formed next to one another. Thus, if the asset falls to $10.25, a brick will not be constructed beside the upper block. Only if its value drops to $10, then you’ll observe a renga underneath the last brick.
For a general decided box size, ATR is utilized. However, ATR aims to get volatility measurements, and as a result, it varies in respect to time. Therefore, ATR-dependent Renko charts are going to apply wavering ATR values for the block size.
As we know that the Renko chart has no fixed duration; then, in this case, a single brick can take several months to build, whereas plenty of bricks can be formed in a single day. Therefore, this can be considered a difference between Renko, candlestick and bar charts, in which the latest bar/candle can be formed at particular timing.
Increment or decrement in the block’s dimensions can make a difference to the “smoothness” of the Renko. For example, as the block size decreases, more swings will be created, and significant turnabouts in rate will also be noticed. Conversely, a larger size box will not indicate many swings but will prove slow to show turnabouts.
These charts efficiently analyze resistance level and support as there is little noise compared to a candlestick chart. Additionally, as a rigid direction is obtained, Renko dealers will get a chance to go a long way before any block formation in the inverse direction.
Renko volume parameter doesn’t exist. Therefore, traders need to combine volume indicators with Renko charts to analyze price and volume simultaneously.
Dealing indications are particularly received when the sight for movement differs, and the blocks change colors. For instance, a dealer would dispose of their share once a red box is observed posterior of passing through several white blocks. Similarly, if there is an upward movement, a dealer will enter once the white or green boxes are observed posterior to a red box or two.
Are Renko charts profitable?
There is no statistical evidence that Renko charts profitable more than standard candlesticks charts for traders. However, Renko charts effectively identify support and resistance levels for some traders than standard charts because of different visual representations and smaller noise.
I created Renko charts vs. candlestick chart systems for the last 100 000 hourly candles for 15 major currency pairs, and I didn’t find any statistical evidence that Renko charts are more profitable. Although trading is an individual process, some traders use indicators and different visual representations that help them to create decisions better.
How to backtest Renko charts?
To backtest Renko charts, you need to use Visual mode in Metatrader Tester. You can develop any strategy, pick wished time frame in the MT4 tester, and monitor performance in Visual mode. However, you can have smaller accuracy if you develop a scalping or intraday strategy.
Renko swing trading
The best Renko chart settings for swing trading set the number of pips equal to half the current daily average true range (ATR). For example, if the daily average true range is around 100 pips, then 50 pips can be excellent settings for the Renko chart for swing traders.
Swing traders use very often H4 chart time frame, and the average stop loss is around Daily ATR/2.
Let us give one example.
Renko indicated a rigid upward move in the market with a $2 box size. Blocks are formed depending on putting the price, and movements lesser than $2 are not considered. A deep pullback appears as a red box, and later the green boxes are also observed. As a rigid upward movement is experienced, it can be a chance for entering a longer path. Once a red box is marked, take an exit.
Once you experience upward movement, a rigid downward moment is built. Similarly, this strategy can be applied for entering short. Hold up till you observe a pullback, indicated by the green box. As the red block is formed, be prepared to get in the shot because the rates can still descend by the long-term downfall. Slip off once the block goes up.
The above given are practical information. Few dealers want to observe two or more bricks consecutively in a specific direction before exiting or entering.
Heiken Ashi vs. Renko
While Heiken Ashi takes an average of open, high, lows, and close, Renko’s chart only measures the current price move. So, Ashi measures past and current price movement differently from Renko charts. Therefore, Ashi charts have a time and price movement component, while Renko charts only price movement.
The Heiken Ashi chart is also made in Japan. The chances of its appearance are the same as the Renko chart, indicating movement prolonged in an upward or downward direction. The Renko charts utilize a decided amount of boxes. Whereas Heiken Ashi charts take an average of open, highs, lows, and close on present and previous times. Hence, each candle and box are different in dimension and indicate the average rate. Heiken Ashi charts & Renko Charts both help similarly denote movements.
Renko charts Thinkorswim
TOS Renko charts represent charts on Thinkorswim that can be easily added using indicators. However, if you need code to add Renko candles at Thinkorswim partner, please use this code below:
Thinkorswim is platform different then Metatrader.
How to calculate Renko bars manually?
To calculate Renko bars please use the following formula:
def c = close;
def bricks = CompoundValue(1, if c > bricks + brickSize
then bricks + brickSize
else if c < bricks – brickSize
then bricks – brickSize
else bricks , bricks);
Renko charts disadvantages
Renko charts display less information compared to bar charts or candlesticks, which makes them less dependable. An asset ranging for a more extended period might be shown within a box, due to which incomplete information is obtained. Renko charts do not show high and low assets like candlesticks charts.
Only current rates are considered; ups and downs are neglected as well. Because of this, many vital reports are missed, as ups and downs may differ compared to closing value. Using closing values may lower noise, although it can naturally deform the value even before the recent box formation and warns the dealer. But, in this case, it gets late enough to sneak out before you make a loss. That is why many investors still apply stop loss at decided values while still using Renko Charts.
As such charts are formed to pursue regular movement of rate, one can get unreal indications as the color of brick can differ faster, thereby generating a whipsaw effect. Hence, if you are utilizing Renko charts, use them in affiliation with other professional studies.
How Should You Trade with These Renko Charts?
It is already clarified above that the user chooses the brick sizes. So in case you trade with these charts, and you’ve opted for 20 as your brick size, then the bricks will be moving only once the prices are 20 pips up or down.
The ideal way to bring this concept into the picture is to view these blocks just like you look at the candlestick charts. Then, you’ll be able to identify the prices easily, although remember there is a chance the time intervals between every brick might be inconsistent.
Important Note: When you choose to trade with these charts, the prices must be traveling double the price distance so that the Renko brick changes colors.
For instance, if the brick size chosen is 20, then you must move up to 40 pips to get the red brick after the green pip is visible. Have you ever wondered why certain blocks include wicks? One of the best Renko chart settings is when the wicks are included, as it is an extremely beneficial tool for trading. The bricks that have wicks provide extra clues when witnessing the bulls and bears of the market.
Wicks are printed on the bricks only when a serious attempt is made to produce a reversal (changing colors from green to red, and vice versa), but it’s constantly failing. So these display how many pips it shifted towards the opposite path.
Important Note: Wicks are printed on a brick only when prices are shifting in a different direction, unlike the previous candle with the length of the brick at +1.
Want to know how to choose the accurate Renko brick size? Check it out right here!
In case you’re unsure about the correct size of the Renko chart, then we’ve got the right knowledge for you.
For a dynamic reading of the prices via Renko blocks, you can opt for the size of a brick identified through ATR. Rather than picking any size of the brick, this option will provide you appropriate support along with more accurate resistance levels.
The Average True Range straightaway detects the correct size of the brick that syncs more with the price action.
Important Note: The only issue of opting to use an ATR-based chart of Renko is that as soon as the value of ATR changes, the bricks are completely redrawn to display the latest changes.
Whilst opting for the size of Renko Brick, consider the following questions:
- What are the goals as a trader?
- What are the constraints of time? What is the cost carried behind trading?
- Should I be opening larger positions or smaller ones?
- Am I tolerant of risks?
In case you’re going for larger and low-risk positions for longer time spans, then it will be correct to go for a larger size of a brick of Renko. Whereas if you’re looking at positions with higher-risk that constantly require attention, then bricks of smaller sizes will be better.
Learn the best Renko chart trading strategy by keeping 4 basic rules of trading in mind.
Renko Trading Strategy Rules
These charts are truly very helpful, and with the right strategy, you can execute their usage successfully.
Below are 4 simple rules of trading that make this system very accurate:
- If the old brick of Renko is green/red when a major change is predictable, the chances that the price may go high/low are pretty much present.
- With double bottom and double top, the success probability is higher than the candlestick chart.
- To confirm any breakouts go for the rule of two bricks. If 2 constant bricks are closing above/below the resistance or key support level, the breakout will be extending.
- Divergence in trading on the chart of Renko is quite assisting when finding reversing patterns.
Simple Renko system
Simple Renko system uses Renko chart and RSI indicator.
1st Renko Trading Stratagy
To use this Renko intraday trading idea, you only need to have the RSI indicator used. You should preferably have the 20-period indicator. With this, the period is just similar to that of the ATR size of a Renko brick.
As you spot the divergence in momentum, entry signals are triggered as soon as there is a chance of reversal. On the chart, a reversal trend is present to move after the change of color in the brick. In such a case, with the spotting of a bearish divergence, there is a short position after which the brick changes into red color.
To witness bullish divergence, wait for some time so that the brick turns green color.
It’s time to exit the profitable trade as another pattern of reversal is formed towards the other direction of the trade. In an attempt to protect the account balance and keep the base amount intact, the SL can be placed either above or below the swing point present after your entry.
Quite much of the hype present in the charts that are regular and time-based is eliminated. Therefore, if you are trading with Renko charts, identifying divergence and reversals in trends is much more convenient. The best indicator to go for along with Renko is RSI.
2nd Renko Trading Strategy
The second strategy you can opt for is focussing on only using the bricks. Again, there is no need for an additional technical tool for this very system.
With this, you get to explore not only a simple but also powerful chart pattern of Renko, considering the wicks as well. The price pattern fetches two bricks of a similar color, and both must include wicks.
This pattern is located doesn’t hold much importance, be it the middle or the end, of a particular trend. The success rate is very high in this pattern if you trade with it in the right way. You have to view these patterns and ensure the blocks aren’t moving back and forth within a single trading range.
If that isn’t happening, you’re all set to use this trade setup with the utmost ease. A third brick makes the entrance after the two bricks include wicks as well. Thus, you can place the stop loss right above the wicks and exit as soon as a reversal pattern is visible.