What Are Renko Charts?
Renk Charts are charts that some traders choose to use to help identify buy/sell signals. By harnessing these charts, investors can pinpoint important levels of support and resistance. Renko Charts focus solely on price movements, ignoring other data such as time or volume. More specifically, these charts center on tracking minimum price changes. The name of these charts are believed to come from the word “renga,” which is Japanese for brick.
Setting Up Renko Charts
To set up a Renko Chart, traders start with an underlying asset, for example EUR/USD, and then determine a minimum price change they want to measure. If the underlying asset experiences the minimum price fluctuation, for instance 10 pips, a trader will place a price “brick” on the chart to denote this change.
When creating one of these charts, an investor will use hollow bricks for upward price movements and solid bricks for price declines. The bricks are drawn at 45-degree angles from one another. In other words, the bottom-left corner of a hollow brick will touch the upper-right corner of the previous brick. Alternatively, the upper-left corner of a solid brick will touch the bottom-right corner of the brick before it.
In addition, the trader will insert one brick for each time the underlying asset rose or fell during a specified period. For example, if EUR/USD rises 32 pips in a day, the investor will place three hollow bricks on the chart.
By following these minimum price movements, traders can identify noticeable gains and losses in the underlying assets that may signal a good time to buy or sell. If markets are relatively flat, the bricks will take some time to form. However, the bricks should form quickly if markets are moving rapidly.
If an underlying asset enjoys an upward trend and then suffers a certain minimum decline, this development will result in the placement of several hollow bricks followed by a solid brick. For example, if a trader opts to follow EUR/USD and designates 10 pips as the minimum price change, a 35-pip gain followed by a 12-pip loss would result in the placement of three hollow bricks and one solid brick.
Selecting Time Frames
Investors interested in working with these charts can use several different time frames to study minimum price movements. For example, traders might want to examine the price fluctuations the underlying assets experience during a single session, in which case they can use daily closing values as the basis for their bricks. In this particular example, they might have to wait several days, or even weeks, before the underlying asset experiences a daily gain or loss large enough to create a new brick.
If investors want to base their charts on shorter time frames, they may want to track the underlying asset by hour and determine whether it has experienced the minimum price movement during that period. In this case, forming a new block could take hours.
Selecting Brick Sizes
Some traders find that selecting the right brick size is crucial to building effective Renko Charts. If the brick size is too small, investors risk focusing on price movements that are too little to provide a helpful buy/sell signal. Alternatively, selecting a minimum price fluctuation too large can put a trader at risk of missing signals that may be more helpful.
To identify the right brick size, some traders experiment with different minimum price movements, sometimes by using a practice account.
By working with Renko Charts, investors can potentially obtain some signals that will help them make better-informed trading decisions. However, Renko Charts are one technical tool among many, so traders may benefit from looking into other methods as well. As always, risk is inherent to investment, so traders can benefit from conducting substantial due diligence and/or consulting with an independent financial advisor.