How to Read a Renko Chart?

Renko charts in the trading spectrum comprise bricks effective to analyse the price movement of assets based on a non-time-based model. Emerged from the Japanese term ‘Renga’, meaning bricks, it represents price trends in red or green coloured bricks.

While trades or investments are taking place, as 9.5 crore Indians invest in stocks directly, stay informed and ensure solid decision-making by learning the working process, associated indicators and more about this chart.

What Does a Renko Chart Denote?

As a trader, if you are curious about what is renko chart, it is a distinct sort of technical chart, and unlike traditional ones, it does not consider time to determine price movement. Here is a detailed view:

1. Price Representation by the Chart

   If you are a trader who is seeking to eliminate market noise and needs insights only on price movements, a renko chart might be effective for you. This chart plots price information in the form of individual bricks. They move upwards or downwards from their earlier brick at a 45-degree angle.

2. Sets Brick Sizes According to Volatility

   On a Renko chart, traders typically draw bricks or blocks in the direction of the price movements of an asset during a trading session. To portray the raw price movement of an asset, traders usually set a brick size and might customise it depending on its volatility.

   In the case of assets that are highly volatile in nature, traders might choose a renko brick of a larger size. Conversely, to display price movements of securities with low volatility, they might choose a smaller brick size on this chart.

3. Process of Brick Size Selection

   Suppose a typically much volatile mid-cap stock that often swings between INR 120 and INR 130, making an INR 10 move on average. Here, as a trader, you might draw a larger brick of INR 5 to filter out minor fluctuations.

   On the other hand, a typically more stable large-cap stock makes an INR 2 move, between INR 100 and INR 102. As a trader, you might set a brick size of INR 2 to capture actual price shifts without skipping over price movements of an entire day.

How Does Renko Chart Work?

Now that you have an idea of the Renko chart meaning, you must also note its detailed working. It might help you to plot asset price movements accordingly on a chart and filter out noise.

1. Choosing the Brick Colour

   A typical Renko chart is made up of red and green bricks or blocks. You place a green block on the chart when the asset price is higher than its previous block. On the other hand, when the asset price dips and it is lower than its earlier block, you place a red block to represent this drop.

   Each brick or block on this type of chart is formed based on a predetermined price point of an asset. As a trader, you can set this price as per your need, and when that price point is breached, you create a new brick or block.

2. Brick Placement Based on Price Movements

   Let us understand these block or brick placements with another hypothetical example. Suppose you set the brick size initially at INR 2 to capture price movement. Now the stock you are following goes from INR 100 to INR 102. Here, you place a green brick.

   Now, the price drops to INR 98, making an INR 4 drop. Here, you draw 2 red bricks next to the earlier green ones. Again, the price moves to INR 104, making an INR 6 move upward. Since the price has moved beyond the set price, you can draw 3 green blocks.

   However, if the price moves again from INR 104 to INR 103 and due to only an INR 1 drop, you do not draw any red block next to its earlier ones.

Thus, a Renko chart eliminates the minimal price movement or noise during a trading day and solely focuses on price changes, helping traders to specifically figure out price trends.

Best Technical Indicators To Trade Using Renko Charts

Usually, day traders might find Renko charts useful to locate price trends and possible reversals. As day trading is tricky, about 20% of such traders typically book profits, and this chart might be effective to strategise while trading. Also, for swing or delivery trades, you can use it, but must employ other technical indicators for trend confirmation:

1. Relative Strength Index or RSI

   Using an RSI with indications of a Renko chart might help determine a more accurate price trend. An RSI indicates when a certain asset is overbought or oversold. An RSI over 70 indicates an overbought situation, suggesting that the market may correct downward. If it is below 30, it means an oversold situation, and the market might retrace to a higher level.

2. Moving Average Convergence Divergence or MACD

   It helps track price momentum and changes in trends. When price bricks on a Renko chart begin to trend, condense or reverse, MACD might become dynamic. Its histogram compares 2 exponential moving averages, and plots an MACD and a signal line. When these diverge, traders look for potential entry and exit points, trend reversals, or accelerations.

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3. Bollinger Bands

   Combining Renko charts with Bollinger bands typically becomes effective in a trending market. Here, Renko bricks help spot strong and continuing trends, while Bollinger bands gauge the market volatility. By adjusting the bands to 1.5 standard deviations instead of the typical 2, as a trader, you can locate volatility shifts earlier and get timely trade signals.

A Detailed Process to Use Renko Charts

Upon getting clarity on the Renko chart meaning and its working processes, you must have an understanding of how to strategise and use it while trading. It will help make informed trade decisions:

1. Deciding on the Brick Sizes

   As you already know, traders set the brick size primarily while trading with this chart. You must also set a price depending on the volatility of your chosen asset. You must also consider other factors such as trading style and asset type while setting its size. Asset types include stocks, commodities, currencies, etc.

2. Identification of Trends

   The next step for the trading strategy on this chart is to identify trends. To identify it, you must observe the sequence of bricks that are either green or bullish. They might also be red or bearish. It helps identify whether your asset’s market is going up or down.

3. Look for Trade Opportunities

   To locate trade opportunities, you must look for price reversals, where asset prices typically move against a prevailing trend. You can also determine a support and resistance level. If prices break beyond the resistance level, you might open a long or buy position. Conversely, if it breaks below the support level, you might open a short position or sell.

4. Set Stop Loss and Use Other Indicators

   Similar to trading with other charts, on a Renko chart, you must also set a stop loss to limit your losses against price movements. For example, if you have set a brick size to INR 2 and your chosen stock value rises from INR 100 to INR 104, you might place a stop loss at INR 102.

You might set a limit order at one or two bricks above at INR 106 or INR 108. You must confirm the trends using MACD, Bollinger Bands, etc., for optimal trading.

Key Advantages of Using Renko Charts in Trades

Before you employ a Renko chart while trading, you must have a look at some of its advantages to reap its full benefits:

1. Simplicity in Trend Visualisation

   Unlike traditional trading charts, a Renko chart visualises trends much simply. It displays only price movements, either upwards or downwards. It makes the chart easier to interpret, as traditional charts might contain much more market noise and even unnecessary data.

2. Helps with Trend Analysis

   Renko charts typically show a trend analysis of an asset’s price, as it shows price incline in bricks and decline in reds. Combined with other technical analysis tools, it helps to determine the support and resistance levels. Breakouts below or above these lines help make selling or buying decisions easier for you.

Conclusion

A Renko chart is a visualisation tool in trading where you can locate the price trend of an asset in the form of bricks. Here, a green brick represents a price going higher. A red brick shows that the price is moving down. Also, it indicates how volatile an asset price is through its larger or smaller size.

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FAQ’s on Renko Charts

1. What are the limitations of Renko charts in trading?

Key drawbacks or disadvantages of this chart come from its not showcasing time data or volume to reduce noise. It might lead to delayed signals, especially in a volatile market, which might in turn result in making market entry or exits at an unfavourable time.

2. Is the Renko chart profitable?

In terms of booking profit from trades using this chart, using it alone might not be wise. Combine its forecasts with other technical indicators such as the RSI, MACD, etc, and make trade decisions.

3. What is the best brick size for Renko?

While there is no fixed best size for this chart, you might follow strategies of what other traders do. Usually, traders set a brick size of about 1/20th of an asset’s price, which means setting an INR 5 block size for a stock trading at INR 100.

4. Which timeframe is best for a Renko chart?

There is no specific time frame for this chart as it depends on your trading strategy and other factors. For example, if you are participating in day trades, set time frames for 5 minutes or 15 minutes. For delivery or swing trades, setting a daily chart might be effective.

5. When to use a Renko chart?

You can employ a Renko chart to identify the potential price trends. For example, use green bricks to enter a long position and red ones to enter a short position. You can also use it when you are looking for range, breakout, pattern trading, etc.