Beginner's Guide to Renko Trading and Charts
Renko charts only show price moves of a specific magnitude, filtering out small movements. There are a number of Renko chart variations, but the main purpose of this charts style is to reduce chart clutter and make trends easier to identify and trade.
Renko charts aren’t for everyone though. Certain strategies require more price information than a Renko chart provides; learn about the benefits and limitations of this chart style before using it.
Renko charts were developed in Japan around the 18th century and are similar to Point and Figure charts.
What's Unique About Renko Charts?
Certain features make Renko charts “smoother” and less cluttered than traditional candlestick or OHLC charts. Because Renko charts focus on movement, time is not a factor. While the charts have a time axis, it is not uniform like on a traditional chart. Renko charts only show specific movement intervals; until the price moves by a pre-determined amount the chart isn’t updated. If the market is quiet and barely moving, days or weeks could pass before a new price bar/box appears.
Each bar or “box” on a Renko chart is the same size, so uptrends and downtrends always move at 45 degree angles. This often makes trends easier to spot, along with pullbacks and reversals.
Renko charts don’t constantly update like traditional candlestick charts. Some information is left out, such as the high, low, close and open on a particular day. This may be relevant information to some traders.
All charts courtesy of StockCharts.com.
Figures 1 and 2 show the same stock over the same period, showcasing the distinctive look of each chart type.
How Are Renko Charts Made?
There are several parameters to set when making a Renko chart. The first is deciding whether the boxes are based on a specific price movement, such as $1 in the case of a stock, or five points in the case of a futures contract.
If you choose the specific price movement, set how much you want each box to be. In Figure 2, each box is $1. Starting at the left of the chart, a new box is only created if the price moves $1. When it does a new box is created.
If the price moves $1 higher, the box is clear/white or green. If the price moved $1 lower the box is red or black. Boxes don’t have to be $1 dollar. The interval can be set to anything. The bigger the box interval the smoother the price will look, but the chart will update infrequently. With a smaller box interval the chart will update more frequently, will show more boxes and won’t be as smooth.
Another parameter to set is whether boxes are drawn based on high and low prices, or closing prices. If you select high and low prices, as soon as the price moves $1 (if that’s your interval) from the prior box a new box is drawn. If using closing prices, a new box is drawn only if the closing price of the stock was more than $1 away from the last box.
The Renko box size can also be based on Average True Range. ATR fluctuates with volatility, so the box size is related specifically to the asset being traded. As with choosing a specific price interval (discussed above), using an ATR based box requires choosing whether the boxes are based on closing or high/ low values.
Figure 3 shows the same chart as in Figure 1 and 2, except each box is now based on ATR (14). Notice the ATR is 2.8, which means over this period a new box is only drawn when the price moves $2.80.
Consecutive boxes never appear beside each other. If the last box was white, the price only has to move $2.80 (in the case of figure 3) higher to create a new box. If the last box was white, the price has to drop $2.80 × 2, or $5.60, in order for a red box to occur. Notice the trend shift in November/early December on Figure 3. The price trades near $117.50, but the next red box shows the price below $112.50.
How Do You Read a Renko Chart?
Long strings of white boxes indicate the trend is higher. Pullbacks are represented by red boxes that don’t fully retrace the last wave of white boxes. A long series of red boxes shows the trend is down and white boxes mark a pullback against the downtrend.
Where boxes touch a certain price area multiple times, but don’t move through it, indicates a support or resistance region. Since Renko charts filter out a lot of small price fluctuations, support and resistance are often clearly defined, and breakouts are as well (compared to traditional candlestick charts). When a box appears above resistance, or below support, is shows the levels have been breached, respectively.
Many chart patterns and standard technical analysis methods can be applied to Renko charts. Figure 5 shows a head and shoulders pattern. Traditional flags or pendants will not appear on Renko charts though; the charts only move at 45 degree angles, and when the market pauses (where a flag or pennant would appear on a traditional chart) the Renko chart won’t produce any new boxes.
See also A Trader’s Guide to Tops and Bottom.
The Bottom Line
Renko charts don’t factor in time, even though there is a time axis. Instead, the chart only updates with a new box when the price moves by a certain amount. This amount can be a set interval, or based on Average True Range (ATR). Renko charts appear smoother than traditional charts, because small movements are filtered out. This will appeal to some traders, but for others who want to see the open, high, low or close price on a particular day, Renko charts aren’t practical. Whether Renko charts are your primary chart type, or a supplement, Renko charts often simplify your trading decision and give you a clear picture of the trend (and reversals).
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