Renko charts show only price movements and use bricks to represent a range of prices. They can display support and resistance levels and patterns more clearly, but may show false signals. Investors can adjust brick size and color. The chart usually uses closing prices, but can also use high/low prices.
A Renko chart only shows the price movements of an asset, unlike other charts which usually also show timescales and volume. Developed by the Japanese, the chart’s name comes from the Japanese word renga, which means “brick.” The chart is made up of bricks, each of which represents a range of prices. Whenever the closing price crosses the range of the previous brick, another brick is added to the renko chart, which can display price movements in exchange rates or stock prices. Usually, one color represents a downward movement and another color represents an upward movement.
A Renko chart has the advantage of showing support and resistance levels and price movement patterns more clearly. A regular chart based on the timing of price movements could show dramatic dips or rises using long rectangles, making the price movements relatively less important. Renko bricks also exclude small price movements smaller than the size of the brick, making it easier to spot trends. If a falling brick follows a series of rising bricks, a trader could quickly make the decision to sell his assets.
The renko chart sometimes shows false signals, such as when price movement suddenly returns to its previous direction, an event also known as the cranksaw effect. This is seen, for example, when an upward trending chart has some bricks that show downward movement, and then move upward again. To minimize the risk of whipsaw losses, investors using the renko chart often wait for at least two or three bricks to appear to point in a new direction before buying or selling the asset.
An investor can adjust the size and color of a Renko chart brick to suit his or her preferences. A chart with smaller bricks has more bricks and shows price changes in more detail. A new brick is added to the chart only when the price change completely fills the brick. For example, if the brick size is $5 US Dollars (USD) and the price moves only $4 USD, no new bricks are added. Traditionally, the bricks are black when the price movement is trending down and white when it is trending up, but the investor can customize the color and other details of his Renko chart to suit his needs.
A Renko chart usually uses the closing prices at the end of the day. It can also use high/low prices, which favor white bricks or upwards. Regardless of the current direction of the bricks, the chart using high/low prices ignores the day’s low prices if the high prices add new white bricks.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
