Renko charts show only price movements, using bricks to represent price ranges. They can help identify support and resistance levels and trends, but may also show false signals. Investors can adjust brick size and color. Renko charts typically use closing prices, but can also use high/low prices.
A renko chart shows only the price movements of an asset, unlike other charts that usually show time and volume as well. Developed by the Japanese, the chart’s name comes from the Japanese word renga, which means “brick.” The chart consists of bricks, each of which represents a price range. Every time the closing price exceeds the range of the previous brick, another brick is added to the renko chart, which can show the price movements of exchange rates or stock prices. Typically, one color represents a move down and another color represents a move up.
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 sharp falls or rises using long rectangles, making price movements relatively less prominent. Renko bricks also remove small price movements that are smaller than the size of the brick, making trends easier to spot. If a down brick follows a series of climbing bricks, a trader could quickly make the decision to sell the assets in it.
The renko chart sometimes shows false signals, such as when the price movement suddenly returns to its previous direction, an event also known as a whipsaw effect. This is seen, for example, when an upward trending chart has some bricks that show a move down and then move up again. To minimize the risk of losses from the whipsaw effect, investors using the renko chart often wait until at least two or three bricks appear to indicate a new direction before buying or selling the asset.
An investor can adjust the size and color of a renko chart brick according to his preferences. A chart with smaller bricks has a larger number of bricks and shows price changes in more detail. A new brick is only added to the chart when the price change completely fills the brick. For example, if the size of the brick is $5 US Dollars (USD) and the price only moves by $4 USD, then 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 trader can customize the color and other details of their renko chart to suit their needs.
A renko chart generally uses closing prices at the end of the day. You can also use high/low prices, which favor white or rising bricks. Regardless of the current direction of the bricks, the chart using high/low prices ignores the day’s low prices if the high prices allow for the addition of new white bricks.
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