Renko Charts

History
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 prior move only if a fixed amount (i.e., the box size) has been exceeded. The bricks are always of equal in size.

Construction
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 Renko chart given below and compare it with the bar chart.