Renko Charts: Definition, How They Work, and Their Significance

What Are Renko Charts?

Renko charts, which get their name from the Japanese word "renga" meaning "brick," are built by adding a brick in the next column once the price exceeds the previous brick's top or bottom by a set amount.

Unlike the typical candlestick charts that are based on time, Renko charts are based on price, making them excellent for highlighting trends and minimizing market noise.

This feature makes Renko charts particularly popular in forex trading, as they help traders concentrate on significant price movements without the distraction of minor fluctuations.

Brick Types in Renko Charts

In Renko charts, bricks come in two main types:

1. Bullish Bricks: These are usually colored white or green and indicate an upward price movement. A bullish brick is added to the chart when the price surpasses the top of the previous brick by the predetermined brick size.

2. Bearish Bricks: These are typically colored black or red and signify a downward price movement. A bearish brick is added when the price falls below the bottom of the previous brick by the brick size.

These bricks are the building blocks of Renko charts, providing a clear visual representation of significant price movements and trends.

How Do Renko Charts Work?

To understand Renko charts, let's look at how they're built.

Each brick represents a fixed price move, known as the brick size. When the price moves by this amount, a new brick is added.

If the price rises, a white or green brick is added; if it falls, a black or red brick is added. This approach filters out insignificant price movements, providing a clearer picture of market trends.

This visual representation helps clarify the concept:

• Trending Period: In the beginning phase, you'll notice a series of green bricks. This indicates a consistent upward price movement. Each green brick appears when the price increases by the predetermined brick size.

• Price Action is Choppy: The next phase shows alternating green and red bricks, reflecting a period of price consolidation or choppy price action. Here, the price movements are not strong enough to establish a clear trend.

• Price Needs to Drop 50 Pips to Form a New Red Bar: At a certain point, the price must drop by 50 pips (the chosen brick size in this example) to form a new red brick. This red brick indicates a downward movement.

• Price Needs to Rally 100 Pips to Form a New Green (Reversal) Bar: Similarly, the price needs to rally by 100 pips from its current level to form a new green brick indicating an upward reversal.

• First 100 Pip Reversal: The chart then shows the first significant reversal, with a green brick appearing after a 100 pip rally.

• Reversed Again: Finally, the chart illustrates another reversal, marking a transition back to a downward movement with the appearance of a red brick.

For a hands-on Renko charts tutorial, you can use tools and software like MetaTrader 4. This software supports Renko charts through custom indicators or third-party plugins that help create them.

Key Features of Renko Charts

Renko charts have several key features that make them valuable for traders:

Filtering Out Market Noise

One major benefit of Renko charts is their ability to filter out market noise. By focusing only on significant price movements, Renko charts help you avoid the distractions caused by minor price fluctuations, making it easier to identify real trends.

Highlighting Significant Price Movements

Renko charts excel at highlighting significant price movements. The fixed brick size ensures that only meaningful price changes are represented, which helps in spotting key support and resistance levels and making more informed trading decisions.

Providing Clearer Trend Visualization

Compared to traditional charts, Renko charts provide a clearer view of trends. The consistent brick size creates a straightforward representation of price trends, making it easier to identify trends and reversals.

The Significance of Renko Charts

The significance of Renko charts lies in their simplicity and clarity.

Renko charts offer a clear view of the market's direction by eliminating the noise and focusing on substantial price movements. This can be particularly beneficial in the forex market, where high volatility and clear trend identification are crucial.

Traders can easily spot key support and resistance levels, trend reversals, and continuation patterns. Additionally, the reduced noise helps minimize false signals, allowing traders to make more confident and precise decisions.

This focus on significant price changes means that traders can better manage risk and improve the timing of their entries and exits, ultimately enhancing their overall trading strategy.

How to Use Renko Charts in Trading

Renko charts can be used in various trading strategies to enhance decision-making. For example, you can use Renko charts to identify trends, recognize support and resistance levels, and spot potential entry and exit points.

Here are some practical ways to use Renko charts in trading:

1. Identifying Trends: One of the primary uses of Renko charts is trend identification. A series of consecutive green bricks indicates an uptrend, while a series of red bricks signifies a downtrend.

2. Recognizing Support and Resistance Levels: Renko charts make it easier to spot key support and resistance levels. Traders can use these levels to set stop-loss orders or identify potential breakout points.

3. Spotting Reversals: Renko charts are particularly useful for spotting trend reversals. A reversal occurs when the direction of the bricks changes. For example, if a series of green bricks is followed by a red brick, it may indicate the beginning of a downtrend, signaling a potential sell opportunity.

4. When to Buy: Traders can consider buying when they observe the formation of a green brick after a series of red bricks, indicating a potential upward reversal. Additionally, buying is favorable during a confirmed uptrend when consecutive green bricks are formed.

5. When to Sell: Selling is advisable when a red brick forms after a series of green bricks, indicating a potential downward reversal. Traders can also sell during a confirmed downtrend when consecutive red bricks are formed.

6. Combining with Other Indicators: To refine their strategies, traders often combine Renko charts with other technical indicators like moving averages, RSI, and MACD.

Renko Charts in MetaTrader 4

MetaTrader 4 is a widely used platform that supports Renko charts. To use Renko charts in MetaTrader 4, you must install custom indicators or expert advisors that generate Renko bricks based on the chosen brick size.

This setup provides you with a powerful tool for analyzing price movements and making informed trading decisions.

Renko Charts vs Heikin Ashi Charts

While both Renko and Heikin Ashi charts aim to simplify price movements and highlight trends, they do so differently.

Renko charts focus solely on price changes, ignoring time, whereas Heikin Ashi charts average price data over time to smooth out price action.

This distinction makes Renko charts more effective at filtering noise and identifying clear trends, while Heikin Ashi charts are better at depicting overall market sentiment.

Advantages and Disadvantages of Renko Charts

Here are the advantages and disadvantages of Renko charts to be considered while trading:

Advantages

• Clear Trend Identification: Renko charts make it easier to identify trends by filtering out minor price fluctuations.

• Noise Reduction: The fixed brick size helps eliminate market noise, providing a clearer view of price movements.

• Simplicity: Renko charts offer a straightforward representation of price trends, making them accessible for beginners.

Disadvantages

• No Time Element: Renko charts ignore the time aspect of price movements, which can be a limitation for some traders.

• Lagging Signals: The reliance on significant price movements can result in delayed signals, potentially affecting timely decision-making.

Conclusion

Renko charts offer a unique and effective way to analyze price movements by focusing on significant trends and filtering out market noise.

Whether you're using Renko charts for forex trading or day trading, their simplicity and clarity can significantly enhance your trading strategy.

By understanding how Renko charts work, their key features, and how to use them in platforms like MetaTrader 4, traders can make more informed decisions and improve their trading outcomes. Join XS today and start using Renko charts in your trading strategy!