- : April 10, 2017
- : Prashant Shah
A logical question after this introductory text is: Can one trade when color of the brick changes? In other words, can we buy when filled brick (bearish) flips to a hollow (bullish) brick and vice versa? Simple answer is yes, but unfortunately, it is very difficult to follow this simple looking strategy.
This change of brick from bearish to bullish or bullish to bearish is called brick reversal pattern. A Bullish brick reversal pattern happens when a bearish brick changes to a bullish brick. Similarly, a Bearish brick reversal pattern is formed when bullish brick changes to bearish. See image below.
Brick reversal formations shows that price has changed the trend. How significant that reversal event is something that requires more investigation.
Brick reversal formations in higher brick-values chart are obviously more meaningful. Let’s address this when discussion on Renko pattern analysis is completed.
Let's begin our discussion on Renko chart analysis with conventional methods and patterns
I am avoiding detailed explanation on popular theories of analysis because there is so much of literature already available.
In the forthcoming section, all Renko charts have been plotted with 1% brick value on daily chart and they represent medium term price action. However, the concepts discussed will be applicable on all brick values and timeframes unless otherwise specified.
Support - Resistance
The term support and resistance needs no explanation for those initiated into technical analysis. In simple terms, support is a level where demand is expected to overcome supply and Resistance is a price level where supply is expected to overcome demand.
All tools and methods of identifying support and resistance on usual charts are also applicable in Renko charts. You'll observe that analysis becomes simpler on these charts due to distinct feature of Renko charts of removing insignificant data to show clear picture.
A. Support - Resistance line
Previous peaks and bottoms are treated as significant support and resistance price levels. We can plot horizontal line form those pivotal levels to draw support and resistance line.
Refer Ajanta pharma Renko chart below showing support and resistance lines.
Due to clarity in the trends that Renko chart captures, it is a visual treat to read them. In the chart shown above, horizontal lines are drawn from important tops and bottoms that acted as support and resistance.
The concept of polarity principle where previous support when broken become resistance and vice versa, is also clearly visible in the above chart. The arrows marked in the above chart highlights the polarity principle.
B. Renko support - Resistance setup
Double top and Double bottom are popular chart formations used in traditional price charts. Double top is a bearish reversal pattern that gets marked when two tops are formed at similar level and price falls below neckline (lowest point between two). Similarly, when price forms two lows in the same zone and goes above neckline (highest point between two lows) of the pattern, it's a bullish reversal double bottom pattern. See image below.
The double top and double bottom patterns explained above can be identified on Renko charts as well. Have a look at image the examples featured in the chart below.
A double bottom pattern in Renko chart is characterised by two bearish bricks appearing at a similar level and a breakout above the neckline of the pattern.
Similarly, price going below neckline after brick forming peaks at similar level is Double top pattern in Renko charts. If you notice, identification of such patterns are simple and objective with Renko charts.
Double bottom is a bullish pattern that shows price has taken support at the previous pivotal point. Similarly, double top is a bearish pattern that shows price has seen resistance at previous peak point. Besides neckline, brick reversal formation provides opportunity to trade patterns. Brick reversal after forming support or resistance at previous brick is a first indication that price is respecting the level. If this formation is traded, it gives early entry but with lesser stop. See the image below for examples.
Renko double bottom support pattern can be identified when a bullish brick appears after two bricks formed at similar level indicating support. Pattern gets negated if price goes below support brick.
Renko double top resistance pattern gets formed when bearish brick occurs after two bullish bricks are formed at similar level. It's a bearish pattern that gets failed if another brick is formed above resistance brick.
Here is the chart of Gail showing Renko support and resistance setups.
A reversal brick provides confirmation of the support and resistance level and it makes it an effective setup.
One can also chose to wait for the neckline break for confirmation but I recommend lower brick value charts in that case. More about this, in the later part of the book.
Brick reversal filters out frequently appearing formations and other methods of analysis helps in identifying better trading opportunities.
Multiple top or bottom patterns such as triple top - triple bottom formations can also be identified in a similar manner. See the chart of Reliance capital below for example.
Note that in case of triple top, double top also remains active because the top brick is not broken by the price.
There could be a question about targets and exit rules. I am restricting the discussion here to patterns and analysis. Trading setups will be explained in detail in the later chapters along with objective rules.
Below is a recent chart of Reliance capital showing Renko triple top and triple bottoms.
Pattern A is triple top confirmed by bearish brick reversal. Pattern B is not a triple bottom because brick did not reverse immediately, though it did eventually. Pattern C is where brick did not turn bearish hence not a triple top formation, in fact it is a resistance breakout pattern.
Below is a chart of SBI showing Renko support and resistance patterns.
Journey from 150 to 150 has few Renko support - resistance patterns in between for you to observe.
Higher low - Lower high
When price forms a low higher than the previous low, it is known as higher low or rising bottom pattern which is a first indication of bullish trend reversal formation. Same way, lower high is marked when price form a high point lower than the previous high, it's a first signal of potential top and significant trait of down trend. Brick reversal formations helps in identifying these patterns. See chart of Ambuja Cement featured below.
Triple top formation shown in the above chart is followed by a significant downtrend. Price formed higher low formation at the bottom signalling impending reversal.
C. Support - Resistance line
Horizontal trend line is another popular technique where a line drawn connecting multiple peaks and bottoms to identify demand and supply zone.
Below is a chart of Axis bank showing horizontal support - resistance lines on Renko chart.
Renko double bottom setup at support line, and when price took support at previous resistance line are visible. Trade can be identified by using these concepts together.
The Fibonacci sequence is named after Italian Mathematician Leonardo Pisa, known as Fibonacci. He introduced the sequence to western world in the 12th century. It is said that this sequence has been described earlier as Virahanka numbers in Indian mathematics.
Fibonacci sequence is series of numbers as shown below
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 ....
Each number in the sequence is simply the sum of the two numbers before it. For example, 2 is found by adding two numbers before it (1 + 1). Same way, 3 is found by adding two numbers before it (2 +1).. and so on.
Fibonacci numbers are treated as nature's number because it is said that they appear in every nature, from the leaf arrangement in plants to pattern of florets of a flower etc. There are many natural things where this ratio is not found, and even if it does - it is not necessary that it would be applicable to markets. I am mentioning it only to be aware that it is not a magical ratio. However, setups can be designed using it.
If one number of the series is divided by the number that follows it, the ratio will be 61.8% - which is also referred as Golden ratio. If one number in the series is divided by the number after the next one in the sequence, the ratio we get is 38.20%. Same way, every number in the sequence is 23.60% of the number after the next two numbers in the sequence.
Fib retracements and extension is a widely followed tool to identify support, resistance and targets. Traders who seek to trade when price correct, found Fibonacci ratios useful to calculate the retracement to trends in the price charts . Generally, 23.60%, 38.20%, 50%, 61.80% and 78.60% are treated as Fibonacci ratios. Actually 50% level has nothing to do with Fibonacci sequence but traders use this level because of tendency of price to reverse after retracing half of the previous move.
It can be applied on Renko charts also. When these ratios are applied on a chart from any swing move, we don't know which ratio will get respect from the price. Brick reversal can act as a tool of confirmation on Renko charts.
See Renko chart of Grasim shown below with 23.60%, 38.20%, 50% and 61.80% Fib retracement applied on it.
Price did not take support at 23.6% retracement and reversed from 38.20% ratio level, trading it with brick reversal becomes better business.
Below is a chart of Grasim during late 2016.
Price retraced from 50% ratio level of earlier down swing move and formed Renko resistance setup.
Other Fib techniques such as extensions or Fib clusters can be applied in similar manner on Renko charts.
Trend line is another basic and popular tool used in technical analysis. They are drawn on the chart mainly to identify trend. They are also useful tool to analyse support, resistance and breakouts. A bullish rising trend line is drawn by connecting minimum two low prices and bearish falling trend line is drawn by connecting minimum two peak points.
Trend lines can be drawn in the similar manner on Renko charts. Connect bottom of minimum two bricks to draw rising bullish line; or top price of minimum two bricks to draw falling bearish line.
Below is a Renko chart of AIA engineering showing different trend lines.
Trend line is A is a bullish rising line that connects the lows of bearish bricks. Trend line B is a bearish falling line connecting top points of bullish bricks. Trend line C is a horizontal line drawn by connecting peak points, it shows resistance that price cleared eventually, resulting in a breakout. Trend line D is relatively steep bullish line drawn by connecting bottoms.
Below is a Renko chart of Reliance infra showing trend line breakouts.
Point A and B shows downside breakout from bullish trend lines. Point C is a resistance trend line breakout after price forming a double bottom formation.
Channel lines are plotted on a chart by drawing a parallel line to the trend line. The Image featured below shows rising, falling and horizontal channel lines
A rising line drawn parallel to a bullish trend line shows rising channel lines. Similarly, a falling channel line is drawn by plotting a parallel line to the bearish trend line. Horizontal channel lines are plotted by drawing parallel line to a horizontal trend line .
Below is a Renko chart of Abirlanuvo showing falling and rising channel lines.
Patterns with trend lines
Traditional chart patterns such as Head & shoulders, Cup - handle, Rounding top bottoms, Triangles etc can be seen on Renko charts as well. Attractive visual appearance and noise filtration methods makes technical analysis much simpler and effective on Renko charts.
Have a look at Renko chart of Tata steel shown below
Swing move B within swing move A. And Swing move C within swing move B. Move D finally breaks out. It is a triangular converging formation where trend lines helped in identifying breakout.
Below is a chart of Adani enterprises that shows chart patterns along with trend lines.
Cup and handle formation at point A and B were effective on the chart of Adani enterprises shown above. Apart from them, support resistance and trend line breach formations are shown on the chart.
Below is a Renko chart of TCS that shows trend lines and Support resistance patterns.
The chart featured below of Aurobindo pharma is another example of support resistance and trend line breakout patterns on Renko chart.
Below is a Renko chart of Tata Motors capturing the concepts discussed in this chapter.
A few more charts are displayed below to illustrate the studies we have discussed so far.
Below is a Renko chart of Dr Reddy for your observation.
Pattern A is inverted Head and Shoulder and Pattern B is Head and shoulder pattern in the Dr Reddy chart shown above. Larger H&S formation is also at play but not shown in the chart to avoid confusion. These traditional patterns are easier to identify on Renko charts.
Below is a chart of Hero Motocorp showing Renko support and resistance formations. Rising bottom formation followed by horizontal trend line break is shown in the chart.
Below is Renko chart of BEML showing trend lines and converging formation.
Higher brick-value charts
Larger degree picture can be analysed by using high brick values. It helps us in gauging larger degree trend and price formation.
Below is a Renko chart of Jswsteel plotted with 5% brick-value.
Below is a chart of Jublfood plotted with 5% brick value.
You will notice smaller bricks at lower levels and higher at higher price level due to logarithmic brick calculation. It is very important to view log bricks while analysing long-term charts.
Below is a chart of Reliance industries showing difficult phase.
Price was in a long convergence formation for about 9 years. Renko support- resistance patterns during this period are shown on the chart.
Nifty & Bank Nifty
All charts discussed so far are stock charts. Let us look at Renko charts of Nifty and Bank Nifty.
As stated earlier, for short-term trading on these charts, one minute time interval charts are recommended. A 10-point brick value for Nifty and 25-points for Bank Nifty is recommended.
Brick value can be adjusted as per one’s trading style. Aggressive traders can also use high-low Renko charts on this timeframe.
Below is a 10-point brick Renko chart of Nifty on one minute time frame.
Trend lines shows converging formation that finally witnessed a breakout. Vertical lines shown in the chart above are day separating lines, price action between two vertical lines are of one day. Notice that not many bricks are formed during the day and clear picture of price behavior can be identified. These factors certainly help in dealing with the major issue of overtrading.
You may find below image quite interesting. It shows few of the days from the above chart in separate boxes.
Types of days are mentioned below each box determined as per the behaviour of the Renko charts.
Don't focus too much on the number of trades on any given day, as we are yet to discuss those aspects. You can count number of bricks on each type of day. There are more bricks when there is action and there is hardly any plotting when price is not moving. By this way, we let market guide us and we avoid imposing our opinions on it. We'll carry forward 'types of days' discussion and strategy design in the next part of the book.
Below is a 10 brick chart of Nifty futures plotted using High-low method.
There are more bricks in this chart compared to chart plotted with closing price method. Double bottom formations are marked on the chart. You can observe rising lows, and resistance breakout formations.
Below is 25 brick chart of Bank Nifty futures plotted using High-low method.
Resistance breakout, polarity principle and trend line is shown on the chart for your observation.
Have a look at Bajajfinsv chart shown below.
Renko charts show us the trend in the best possible manner. Observe strong trending moves in the chart shown above, wherein there are very few corrective bricks in between. Riding a profitable position is arguably the most difficult thing to do. But remember that the ability to ride the trends is essential to make significant returns in trading.
So far, you have understood how Renko charts are drawn and how traditional methods of analysis can be applied on it. This is how most of the traders use Renko charts. Every other method of analysis is also applicable on Renko charts. To begin with, you can open a Renko chart as per your brick value and look for patterns such as support - resistance, higher-high, lower-high formations and draw trendlines. This will help you get your accustomed with this Renko charts and you can gain confidence and proficiency in the method.
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