Renko charts and their interesting features
Tags: Technical Analysis, Trading, Renko, Charts, Investing

Though I had heard about Renko Charts long back, I never bothered to study them in detail, mainly because they looked too neat and simple. Recently when I was thinking about noise in candlestick charts, and how this makes trading decisions difficult, Renko charts caught my attention. I noticed that because of how the Renko charts are constructed, they have some interesting features. First, let us start with a brief introduction to the Renko charts.

Introduction to Renko Charts

Renko charts, unlike candlestick charts or other charts used in financial time series data representation, do not take time into consideration. Renko charts are built by drawing a series of bricks and each brick is added when the price moves by a fixed amount compared to the closing price of the last brick. Green/White brick is added when price increases by a certain amount (brick size) and red/black brick are added when the price falls by a certain amount. And the last rule is consecutive bricks will not be drawn at the same level.

As a user of Renko charts you only need to decide on the size of the bricks and time period. Here size of the brick means minimum price movement needed in the chosen time period to draw the next brick. Geometrically it is the height of the brick. Generally, a fixed value or Average True Range (ATR) is used as a brick size. We can choose any convenient time period (1 min, 5 min, 1 day, etc.) based on our strategy. Renko charts can even be constructed with tick values.

Renko charts are supposedly invented in Japan and the word Renko is derived from Japanese word renga and yes, renga means brick in Japanese. The following are some of the interesting features of the Renko charts.

Features of Renko Charts

The closing price of current brick is the opening price of the next brick when there is no trend reversal: Renko charts are continuous or what one may term them as non-porous (in contrast to candlestick charts). So, when a brick gets drawn on a Renko chart it essentially sets the starting level for next brick, provided the price keeps moving in the same direction. Trend reversal happens when price moves by twice the brick size in the opposite direction: Again this is the consequence of the Renko chart construction rule that no two consecutive bricks can be drawn at the same level. This rule also makes Renko charts pointy when there is a trend reversal. The good thing about this rule is that it helps in filtering out false trend reversals to some extent. The opening price is also the opening price of the next brick when there is a trend reversal: As Renko charts are continuous and two consecutive bricks cannot be drawn at the same level, the opening price of the current brick and the next bricks will be same when the price starts moving in the opposite direction. Trend angle has no additional information: Based on how Renko charts are drawn by different platforms, they might look slightly different. But the angle of the trend line doesn’t give you any additional information. It depends on the width of the bricks. There are no rules for deciding the width of the brick. Actual High/Low will not be captured: Yes that is true. Even if the price moves close to brick size, but returns and nosedives without crossing the brick size, then this information will be lost. High/Low will be within one brick size: Don’t feel sad after reading the last point. In the worst case, the peak/high price reached will be a shade below one brick size from the peak indicated by Renko charts in case of an uptrend. Similarly, in downtrend actual lowest price will be within one brick size from the low indicated on the Renko chart. The timestamp of the brick is the time when the brick gets drawn: For a moment let us consider candlestick charts. When we have a candle for say 9.30.00 a.m. on a 5-minute chart, what does this represent? It represents all the price movements from 9.30.00 a.m. to 9.34.59 a.m. The candle is drawn based on open, high, low, close occurring for this period. On the contrary, when we have a brick drawn at 9.30.00 am on Renko charts, it indicates that at 9.30.00 a.m the price moved (and also closed)more than the brick size compared to last close (assuming the there is no change in the trend). There will be many bricks with the same timestamps: This is quite interesting. Say our brick size is 10 and what happens if the price moves by 100 in a given time period. On the Renko chart, there will be 10 consecutive bricks drawn with the same timestamp (assuming there is no change in trend). Many times it is exactly because of this nature of Renko chart that we see long trend lines. This is especially true when there is a gap-up or gap-down opening. So don’t get excited by seeing long trend lines on Renko charts, it may not be possible to trade all these seemingly long trend lines. The width of the Renko Chart will be different for different days: This is quite obvious if we remember that time is not an influencing factor in Renko charts. Then on what parameters does the Renko chart width depends? The Renko chart width is a function of brick size, volatility, and net price movement. This is a bit irritating and makes the comparison with time-dependent charts difficult. All movements more than brick size will be captured: This may seem obvious. But compare this with candlestick charts which are defined by only five parameters viz. open, high, low, closing price and time stamp. The price movement within the candle will not be captured by the candle. Volatility within the candle gets lost.

Some of the points above points may be obvious, but we have to keep them at the back of our mind and will save a lot of time when we try to build our own Renko charts, say for Algo trading. Let me know if you have noticed any other unique features of the Renko charts.