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What Are Renko Charts?

Renko charts are a popular charting technique used by traders to visualize price movements in financial markets. Unlike traditional charts, Renko charts use bricks to represent price movements, with each brick being of a fixed size and representing a predetermined price range.

In this article, we will explore Renko charts in more detail, including their origin, how to read them, advantages, disadvantages, and how they compare to Japanese Candlestick charts.

Renko Chart@300x

Note: the TrendSpider Platform does not currently support Renko charts. The above image and this page are provided for informational purposes only. This chart type cannot be accessed on TrendSpider at this time.

Origin of Renko Charts

Renko charts originated in Japan during the Edo period (1603-1868), where they were used to track the price movements of rice futures. The word “Renko” comes from the Japanese word for brick, which is “renga.” In Japanese, “ren” means “brick” and “ko” means “small.”

Renko charts were developed to filter out market noise and focus on price movements that were significant enough to be represented by a new brick. The bricks on a Renko chart are created based on a set price range, rather than a fixed time interval, which means that bricks are only added to the chart when the price has moved by the predetermined amount. This can help to smooth out the price movements, making it easier to identify trends and potential trade opportunities.

Renko charts have since become popular around the world, with traders using them to track a range of financial instruments, including stocks, futures, currencies, and commodities. They are particularly popular among traders who use technical analysis to inform their trading strategies, as Renko charts can help to filter out market noise and provide a clearer picture of market trends.

How to Read Renko Charts

Here are the steps to read a Renko chart:

  1. Understand the basics of Renko charts: Renko charts are constructed using bricks or boxes. Each box represents a fixed price movement in the underlying asset. For example, if you set the box size to $1, each box on the chart represents a $1 price movement.
  2. Determine the box size: You need to choose an appropriate box size for the asset you are trading. The box size should be determined based on the volatility of the asset. A larger box size will result in fewer boxes on the chart, whereas a smaller box size will result in more boxes on the chart.
  3. Identify the trend: Renko charts are great for identifying trends in the market. If the boxes are consistently moving in the same direction, then the trend is considered to be strong. If the boxes are moving in different directions, then the trend is considered to be weak or choppy.
  4. Look for reversal signals: Renko charts can also help you identify potential reversal signals. A reversal signal occurs when the boxes change direction. For example, if the boxes were moving up and then start moving down, this could be a sign of a potential reversal.
  5. Use other technical indicators: Renko charts can be used in combination with other technical indicators to confirm signals. For example, you could use a moving average on a Renko chart to help identify the direction of the trend.

Reading Renko charts requires a bit of practice and experience. Once you become familiar with the basic concepts, you can start using them to make more informed trading decisions.

Pros and Cons of Renko Charts

Renko charts have some advantages and disadvantages compared to other types of charts. Here are some pros and cons of Renko charts:

Pros:

  1. Emphasizes trends: Renko charts are great for identifying trends in the market. The boxes on the chart only change when a certain price movement has occurred, so it is easy to see the direction of the trend.
  2. Removes noise: Renko charts remove a lot of the noise that you may see on other types of charts. This makes it easier to see the overall trend and potential reversal points.
  3. Offers clear entry and exit signals: Renko charts provide clear entry and exit signals. When a new box is formed, it indicates a potential entry or exit point.
  4. Simple to understand: Renko charts are relatively simple to understand compared to other types of charts. Once you learn how to read them, it is easy to see the overall trend.

Cons:

  1. Limited information: Renko charts only show price movements and do not include other information such as volume or time. This can limit the amount of information available to traders.
  2. Not always accurate: Renko charts can give false signals, just like any other type of chart. It is important to use other indicators and analysis to confirm the signals provided by the chart.
  3. Box size selection: Selecting an appropriate box size for a Renko chart can be difficult. The box size needs to be adjusted to the volatility of the asset being traded.
  4. May require additional analysis: Renko charts may need to be used in combination with other technical indicators to confirm signals and provide additional information.

Renko charts can be a useful tool for technical analysis, but they do have some limitations. It is important to consider both the pros and cons before using Renko charts for trading.

Renko Charts vs. Japanese Candlestick Charts

Renko charts and Japanese candlestick charts are two popular types of charts used in technical analysis. Here are some differences between the two:

  1. Time vs Price: Japanese candlestick charts are time-based, while Renko charts are price-based. Candlestick charts display the price movement over a certain time period, such as 1 hour or 1 day, whereas Renko charts display the price movement based on a set price movement, such as $1 or $10.
  2. Visual appearance: Renko charts consist of boxes that are either colored red or green, while candlestick charts consist of a series of candlesticks that can be colored in different ways to indicate bullish or bearish activity.
  3. Noise: Renko charts remove some of the noise that can be seen in candlestick charts. This is because Renko charts only change direction when a certain price movement has occurred, which helps to remove some of the smaller price fluctuations.
  4. Trading signals: Both Renko charts and candlestick charts can be used to identify trading signals. Renko charts provide signals when a new box is formed, while candlestick charts provide signals based on the shape and color of the candlesticks.
  5. Complexity: Renko charts are relatively simple to read and understand, while candlestick charts can be more complex. Candlestick charts offer more information, including the opening and closing price, as well as the high and low price of each period.

Renko charts and Japanese candlestick charts are two different types of charts used for technical analysis. Both charts can be used to identify trading signals, but the type of chart used may depend on the individual trader’s preferences and trading strategy.

The Bottom Line

In conclusion, Renko charts are a useful tool for technical analysts and traders who are looking for a simpler way to interpret price movement. The chart’s unique construction, based on price movement rather than time, can help traders to identify key support and resistance levels and trends in the market. Renko charts also remove some of the noise that can be seen in traditional candlestick charts, making it easier to identify significant price movements.

However, Renko charts do have their limitations, such as a lack of detail on the price range of each box, and may not be suitable for all trading strategies. Traders should consider their individual needs and preferences when deciding whether to use Renko charts as part of their trading analysis.

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