- : April 9, 2017
- : Prashant Shah
We discussed formation of Renko chart using absolute values such as 5 or 10. Renko chart can be plotted with any such number. But often a chart moves in a wide range which makes defining the brick value difficult. A chart like Aban offshore, that was at 5000 at some point in time and it went to 200 from there as well. If I am using a brick value of 50 at 5000, it becomes 1% of that price but what if I am using the same brick value and price falls all the way till 200?!!
The brick value here is no longer 1% but 25% of the price! This is the major issue with looking at larger duration Renko chart with absolute numbers.
Technology comes as a saviour to deal with this issue. We can use log-scale and log-brick values to plot Renko chart. So if we use 1% log scale, a bullish brick will get formed if price moves higher by 1%. Same way next brick when price moves 1% higher again. Bearish brick will get formed if price goes below the low of previous brick. Bullish brick from bearish will get formed if price moves higher than high of the previous brick. The principle remains same, but log brick value is utilised instead of absolute value.
Below is the Renko chart of Hindalco with 1% brick value.
Below is the chart of Bhel plotted with 5 brick size Renko.
Bhel was trading around 300 during Feb 2015 and it traded below 100 during March 2016. Chart looks good but difficult to trade in the later stage because of brick size issue. In simple words, 5 brick size when it was trading at 300 becomes 1.66% of price, and when it is trading at 100 becomes 5% of the price. So the same brick size cannot be followed and it needs to be altered with the changes in price which is normally a very difficult task. So, a longer-term chart would be difficult to analyse with an absolute brick size.
Log bricks are of great advantage. Below is the Renko chart of Bhel plotted with 5% brick size for the same period.
Brick size changes as per the price level due to the log scale which is accurate and practically possible to be followed. Notice the chart shown above where bricks are large because price level was high and they become smaller as price fell to lower levels.
This allows user to plot consistent chart and most importantly, make them practically trade-able. Below is the Bhel chart plotted with 1.5% brick size for the same period. Compare it with the figure 1 and notice the difference in the latter part when stock started falling.
Great advantage of Log Brick charts is that they lend themselves to scanning for opportunities across an universe or group of stocks. 5 brick size for a stock trading at 1000 and for the one trading at 100 is different hence scanning is impossible with absolute brick size. But 1% across the chart remain 1% of the price irrespective of the price level that a stock is trading at.
We can therefore run a scanner for a strategy across a group of Renko charts with using log brick value.
Defining it with log scale brings compatibility and facilitates system testing. You can run screeners around the group of stocks and it makes the chart analysis more simpler and logical. Hence log Renko charts are preferable over other methods.
ATR Brick value
Lot of people and software use 14 day Average true range (ATR) as default brick value for Renko. Logic is that it considers volatility and shows the chart accordingly. The problem with this kind of method is that brick value keeps changing along with the ATR. So if you enter based on previous ATR based Renko chart, how to deal with it when ATR changes, resulting in a change in the brick value and chart structure. Hence log brick values are preferred over dynamic methods of determining brick values.
In traditional candlestick / bar chart, we can plot higher time frame charts by using monthly, weekly, yearly etc time-frames. We can achieve the same in Renko charts by adjusting the brick value instead of using weekly, monthly or yearly prices.
Instead of plotting charts using weekly or monthly price data, we recommend plotting higher brick value charts using the daily price data in order to analyse the larger degree picture.
Hence, for short term analysis, you can use a 0.50% brick value based on daily chart. Use 1% brick value daily chart to get a medium term picture and 3% or 5% brick value to get a much larger degree picture.
Below is a Renko chart of Tvs Motors plotted with 0.50% brick value.
Same chart plotted with 1% brick shown below.
You can notice that brick values are compressed and noise is reduced.
Below is a chart of TVS Motor plotted with 5% brick value to look at the larger picture.
You can see size of the brick increasing with the price. This is the advantage of log charts and hence trend lines and other analysis becomes more logical on these charts.
Same way, for intraday time intervals, I recommend one minute time frame to plot the charts. One can use 0.25% brick value for stocks. I recommend 10 and 25 absolute brick value for Nifty and Bank Nifty charts on one minute timeframe. One can adjust these brick-values as per the trading style and preferences. An aggressive trader, looking for more number of trades, can opt for a lower brick value. A momentum trader on the other hand can increase the brick-value in order to ride the trend.
I can assure that whatever your style may be, following these simple charts will certainly help you in filtering unnecessary trades and dealing with emotional issues and over trading.
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