What are Renko Charts?
They are stock charts used in charting and study of chart patterns in technical analysis. They are trend following technique and are excellent in catching major portion of the trend.
This chart has its origin from Japan. These were developed in eighteenth century, to trade rice. Later on they were found useful in trading any other financial instruments. Just like in Kagi chart & Point and Figure chart, Renko charts also disregard the time factor in X axis.
This charting method is thought to have acquired its name from a Japanese word 'renga' meaning 'brick'. These charts are similar to Three Line Break charts except that a brick (or a line) is drawn in the direction of the previous price move only if a fixed amount of price, which is called as the box size, has been exceeded. The bricks are always of equal in size.
The size of boxes or the bricks which constitute these charts are predetermined by the chartist. They are color coded for better appreciation of the trend. The bricks that go up are made white, green or blue and the bricks that go down are made black, red or orange.
To draw Renko bricks, today's close is compared with the high and low of the previous brick. When the closing price rises above the top of the previous brick by the box size or more, one or more equal height, white (or blue) bricks are drawn in the next column. If the closing price falls below the bottom of the previous brick by the box size or more, one or more equal height, black (or red) bricks are drawn in the next column.
If the market moves up more than the amount required to draw one brick, but less than the amount required to draw two bricks, only one brick is drawn. For example, in a two-unit Renko chart, if the base price is 100 and the market moves to 103, then one white brick is drawn from the base price of 100 to 102. The rest of the move, from 102 to 103 is not shown on the Renko chart. The same rule applies any time the price does not fall on a box size divisor.
This type of chart is very effective for traders to identify key support and resistance levels. Buy/sell signals are generated when the direction of the trend & color of the bricks changes.
Study the chart given below and compare it with the bar chart.
Click on these charts to see bigger charts.
This Renko Chart has a Box Size of 25
This bar chart is for the comparison.
All the charts given above belong to the same stock and time frame.
A change in colour of the brick signals the change in the trend. A new white brick indicates the beginning of a new uptrend. A new black brick indicates the beginning of a new downtrend.
So buy when a new white or blue brick appears and sell when black or red brick appears.
Since the Renko chart is a trend following technique, there will be whipsaws in the side trend. But this technique is intended to allow the traders to ride on the major portion of the trend.
Since a Renko charts filter out the minor ups and downs, they are excellent to determine support and resistance levels.
There are many types of charts used in stock analysis. You may click on the name of each chart listed below to learn and understand more about them.