What is a Renko Chart
A Renko chart is a type of chart, developed by the Japanese, that is built using price movement rather than time and volume. It is thought to be named for the Japanese word for bricks, "renga," since the chart looks like a series of bricks.
BREAKING DOWN Renko Chart
Renko charts are designed to filter out minor price movements to make it easier for traders to focus on important trends. While this makes trends much easier to spot, the downside is that some price information is lost in the mix.
The first step in building a renko chart is selecting a box size that represents the magnitude of price movement. For example, a stock may have a $0.25 box size or a currency may have a 50 pip box size. A renko chart is then constructed by placing a box in the next column once the price has surpassed the top or bottom of the previous box by the box size amount. White bricks are used when the direction of the trend is up, while red bricks are used when the trend is down to make it easier to visualize the trends.
Many traders use renko charts in conjunction with other forms of technical analysis. For example, a renko chart may be useful for determining the prevailing trend and then a more traditional candlestick chart with technical indicators may be used to identify specific entry and exit points along the trend. This is usually the case since renko charts don't show as much detail as other charts given their lack of reliance on time. A stock that has trended sideways for a long period of time may be represented with a single box, which doesn't convey the importance of the move.
Renko Chart Signals
Trading signals are typically generated when the direction of the trend changes and the bricks alternate colors. For example, a trader might sell an underlying asset when a red box is placed at the end of a series of climbing white boxes. Since this type of chart was designed as a way to follow the general price trend of an asset, there can often be false signals where the color of the bricks changes too early, producing a whipsaw effect. This is why it's important to use renko charts in conjunction with other forms of technical analysis.