- July 29, 2019
- Posted by: CoachShane
- Category: Trading Article
The best way to answer the question “what are Renko charts”, is to describe them as fixed sized bricks that plot on your chart in relation to price movement.
They are very different from the common bar chart, Japanese candlestick charts, or Heiken Ashi charts as Renko charts (Renko bricks) only print another “brick” when price movement exceeds the box size that is set.
Understanding that another brick prints only when a set amount of price movement has occurred, you can see a huge benefit of Renko charts is the removal of market noise.
Renko charts appear to lag current price because the chart does not constantly plot according to time which may be an issue for some traders.
How Renko Charts Work – The Details
Renko bricks do not use time to plot on your chart. When the Renko plots depends on your input which can be done three common ways:
- Set the bricks size of the Renko chart by using the ATR method (uses market volatility) – generally a 14 period average true range
- You can set the Renko chart brick size on some random number
- Use a percentage based on the price of the instrument you are trading.
Renko charts work with any instrument and here is a daily Forex chart that compares the Japanese candlestick chart with Renko
The Renko chart has a brick size of 61 pips that is set via the ATR automatically. You can see how smooth the price action is on the Renko compared to the mess on the Japanese candlestick chart.
Lower time frame Renko charts would have a smaller brick size which is important for intra-day traders.
Note that only the corners touch on the Renko bricks and if we take 61 pips as the set size, price would need to move 62 pips in order to have another brick plot.
Cons Of Using Renko Charts
While not seeing a mess of price action has its pros, traders will never have the exact price plotted via the Renko. Yes, you can decrease the brick size to have more plots but then you are defeating the biggest pro of Renko and that is cutting down on the noise of the chart.
Traders that like to be active in the market such as day traders, may discount the use of Renko in their strategy.
Strategies You Can Use for Renko Charts
There are many ways to trade but I am going to focus on two broad overviews to give you an idea of how simple Renko charts make price action trading:
- Support and resistance holding or failing
- Overextended markets mean reversion
I will add that you can use these exact same trading strategy approaches with candlesticks but you will find that Renko charts will allow you to see structures on charts, better.
Resistance and Support Holding/Failing
I have synced all the lines to each chart and you can easily see all the choppy action on the candlestick chart is non-existent on the Renko. The Renko has allowed you to spot the range and the breaks quite easily.
- This move breaks over resistance but fails back inside the range. I call these “failure tests” and this zone lines up with #3 on the left chart.
- This lines up with #4 and is a successful breakout. The up sloping trend line is simple to apply to the Renko chart which gives and indicator that the breakout has a higher probability of sustaining due to price making higher lows into resistance.
As an aside, this snapshot is a live Renko chart and you can see on the right that while the Renko plots at 1.7641, the true price was 1.7607. You can see what that is an issue for active traders.
What is obvious is that you can not trade candlestick patterns that rely on shadows or inside bars. You can, as you see on the above Renko , look at various forms of triangles and horizontal chart patterns.
Mean Reversion – Oversold and Overbought
I will use a trading indicator (RSI) for the oversold/overbought reading but in live trading, I resort to price action and context to find mean reversion candidates.
This is the daily stock chart of Citigroup. Renko charts can be used for a stock trading strategy, futures, Forex.
We are not always going to catch every move and when using oversold/overbought strategies, you may not get a corresponding price structure setup. The far right shows an oversold stock yet you’d have to search for a price structure reason to enter.
Let’s break this chart down
- The market was overbought and then sunk below the overbought 70 level. Price was putting in higher highs and lows while price hovered around the overbought level. A simple trend line shows where price made a lower low, failed to make a higher high and was capped at the backside of the trend line for a short
- Price is oversold and has come right into a previous zone of resistance that is acting as support at this location
- Price is sustaining an overbought condition. Price breaks the trend line and puts in a double bottom. Failing to make a high is the short zone on the back of the trend line.
What I like is that double tops and bottoms, ranges, any consolidations are easy to spot with Renko charts. This makes being on alert for breakouts much easier.
Should You Use Renko Charts For Your Strategy?
I can’t answer that for you but for me, I would not wrap a complete trading strategy around using Renko charts.
There is some price action I like to see including momentum types of price action movements.
As for finding support and resistance, I like them.
Traders often think that support and resistance are exact price points but they are not. They are zones of price and Renko charts allow you to see those zone quite easily. In that case, they would make a good addition to a strategy.
Are Renko charts good for trend determination?
If I were to use Renko, determining the overall trend direction would be something I would consider.
If you were to follow the trend direction shown by the renko chart, you may have not been involved in the price direction on the candlestick chart. This will depend on the setting you choose for the Renko.
To sum it up:
I prefer sticking to the more conventional charts but Renko does have some pluses such as removing market noise and giving you a clear view of price structure.
There is no “best” when it comes to your charting type as every trader is different.
Find what works for you and for some, a Renko chart strategy may be where you find trading success.
Since we are talking about price action on the charts, take a look at our Candlestick Reversal E-Book you can download for free.
Love RENKO. Been using it for two years. Looking forward to more of your articles.