Renko Charts are one of the types of charts created by Japanese traders. It is believed that the name of the graphic comes from the Japanese word “renga” – brick. This charting method is convenient for identifying trends that may not be so obvious on charts built from regular candles. One of the main differences between Renko charts and bar, line, or Japanese candlestick charts is that Renko does not take into account time or volume.
Renko charts are constructed as follows: the closing price of the current period is compared with the minimum and maximum levels of the previous “brick” (white or black). If the closing price of the current period rises above the high of the previous “brick” by at least the size of the “brick”, then one or more white “bricks” are drawn on the chart in new columns. If the closing price of the current one falls below the minimum of the previous “brick”, not less than the size of the “brick”, one or more black “bricks” are drawn on the chart. If the closing price moves below the low or high of the previous brick by more than one brick, but this is not enough to form two bricks, only one brick is drawn.
Thus, a new “brick” appears on the chart if the price passes the maximum or minimum of the previous “brick” by a certain amount (the size of the “brick”). Accordingly, the frequency of the appearance of new bricks depends only on the movement of the asset price and does not depend on time. The figure below shows the main difference between the Renko chart and the usual one, the market noise is filtered out, the price movement is “reversed”.
All bricks on the chart are the same size, which is determined by the trader in his own technical analysis program and must be more or equal to the minimum change in the asset price. For example, if you are plotting a Renko chart with a 20-point brick, then an upward movement of 100 points will look like 5 white bricks. Usually, white bricks are used for an uptrend, and shaded bricks for a downward trend, but each technical analysis program can use its own colors.
Bricks are always displayed strictly at an angle of +45 degrees or –45 degrees with respect to the previous one. Once a brick is created, its size will never change, and it will never be removed. The size of the Renko bricks determines the accuracy of the trend display and is set depending on the volatility and long-term of your trading tactics. The smaller the size of the bricks, the more of them will be displayed on the chart, and the more clearly the price movement will be displayed. The larger the Renko bricks are, the fewer candles there will be on the charts and the more hidden price movements there will be. Therefore, you should be careful when choosing the size of the candle.
Using Renko charts
It is believed that the Renko chart is a very effective tool for identifying key support and resistance levels , since it filters the underlying trend of an asset without taking into account minor price fluctuations. The main signals to enter the market appear when the direction of the trend changes and, accordingly, the color of the “brick” becomes different. For example, a sell order comes when the white streak ends and the first black brick appears. A buy order occurs when a series of black bricks ends and a white brick appears.
Since Renko Charts was created to identify the underlying trend of an asset, the chart itself gives a lot of false signals, especially on sideways and short trends, however, it almost always allows you to catch the main part of a large trend.
Renko charts are always built based on the closing prices of the period for which they are calculated, therefore, when they are created from charts of a different type with different periods, the result may be different. The larger the scale on the basis of which the Renko chart is built, the more likely it is that its main drawback will appear – the change in its readings in real time, therefore, it is most correct to build Renko charts based on tick or minute data.
On the Renko chart, you can use the same types of graphical and indicator analysis that predict the charts of bars and Japanese candlesticks , but it is worth considering a number of points: on the Renko chart, the minimum and maximum of the white “brick” always coincide with the open and close prices, respectively, and the minimum and maximum black brick, on the contrary, with the closing and opening prices of this “brick”, therefore, indicators that use in their calculations a comparison of the opening, closing, minimums and maximums within one “brick” may work incorrectly. Since there is no volume on the Renko chart, indicators that take into account volume will not work at all.
Installing Renko Chart in MT4
1. Download the RenkoLiveChart EA, which generates Renko bars (adapted to 600 builds).
Download: RenkoLiveChart v3.2 600+
2. Open the chart of the required currency pair on the M1 period (in the example, GBPUSD).
3. Add an Expert Advisor to the chart, specify the period and size of the brick in the settings (in the example M2).
4. Open the Renko chart: File-Open Offline (in the example GBPUSD M2).
5. The M1 chart must remain open, it is used to form the Renko chart.
Advantages
1. The main advantage is a non-standard approach to technical analysis. Considering that the majority of traders use standard charts, the use of Renko charts provides a competitive advantage. With their help, you can see price action patterns that cannot be seen on regular charts.
2. Renko charts can almost completely eliminate noise. This is especially important for trending trading systems , but it can be a disadvantage for flat trading systems .
3. Renko charts open up additional opportunities for using indicators. As you know, the main drawback of any indicator is lagging, since the formula takes into account new values only after the candle closes. Thus, if the range of one candlestick is 5 points, and the next one is already 15, there is a significant lag that cannot be eliminated by any manipulations with the price type. In the case of trading on renko charts, this problem is eliminated automatically, since each “brick” is equal to the previous one, respectively, all of them become equal in terms of influence on the result of calculations.
4. It is very easy to scalp using Renko charts, since you do not need to wait for the candlestick to close and you can open an order immediately after the opposite bar is formed. Thus, while all other speculators do not risk entering into deals before the current candle closes, a trader who trades on renko charts either catches several signals or opens an order much earlier than his colleagues, without losing points in the shadows.
disadvantages
1. Noise cancellation can be a disadvantage. One of the difficulties is that it can take several hours to form and display each subsequent brick. During the period of consolidation, it will take much longer to form. At that moment, while the next brick is forming, the candlestick chart could show consolidation, an unwanted reversal, or a frequently changing direction of price movement. It should be remembered that in the area of accumulation of key price levels, there is a frequent alternation of multidirectional Renko bricks.
2. Criticality to the size of the brick. Smaller Renko bricks will show upcoming reversals faster, while larger bricks will delay recording price movement.
3. Delay in displaying reversals. In a trend, the difference between the top of a light-colored Renko brick and the bottom of a new, oppositely directed Renko brick is three times the size of that brick. This is because for the oppositely directed Renko brick to form, the closing price needs to be below the bottom. Thus, waiting for the next, oppositely directed Renko brick to appear, you will need more time. As a result, you will also need to resort to other methods in order to protect your bottom line.
4. False signals in reversal strategies. The number of oppositely directed Renko bricks is much smaller than the number of unidirectional bricks. For the trend, this is only an advantage, however, working in combination with many trend indicators, you can get too advanced, and therefore false, signals for reversals.
5. Renko charts will not allow using tick volumes. This is due both to the inoperability of many volume indicators on renko, and simply to the inappropriateness of their use.
6. The inability to observe the change in prices during a specific period, in some cases, in the market, it can be useful. In this sense, ordinary price bars have a colossal advantage over Renko charts. It is recommended to open the chart of the bars of the required currency pair in conjunction with the Renko chart. So you can more effectively conduct market analysis before the start of the trading day.
Renko charts can be beneficial to both scalpers and long-term traders, depending on which period is used and which brick size is set. In particular, scalpers rarely use bricks larger than 1-3 pips on four-digit quotes. Of course, a lot depends on the volatility of the instrument, but since Forex is objectively one of the calmest markets, the mentioned range becomes more than enough for intraday trading. If the trader prefers to catch long-term trends, then the size of the brick should be at least 20 points.
Adjusting the size of bricks on a Renko chart is more of an art than a science. In order to determine the optimal sizes, it is necessary to perform various studies, but, by and large, the size of the brick is specific for each individual instrument and its volatility range. You should experiment with different brick sizes in practice and find a brick size that matches your strategy and indicators.
