- : April 8, 2017
- : Prashant Shah
Renko charts have their origins in Japan and were used during the 19th century. It was introduced to the rest of the world by Steven Nison who discussed this methodology in his book, “Beyond Candlesticks”.
Similar to the Point and Figure charts, the Renko charts too ignore time and volume. Same is the case with Kagi & Line-Break charts. These time-independent charts plot only price action that is significant. The user has to decide the quantum of price move that is significant enough to be captured in the chart.
Hence, these charts eliminate noise and lends themselves to easily readable chart patterns. Simplicity and objectivity are major advantages of these charts.
Usual charts that we see such as bar or candlestick have got two dimensions - price and time. Price is plotted on Y axis and the time on X axis. Charts move when the time passes by, irrespective of the price trend.
Renko charts do not plot time and volume, they capture price action that is “significant”. It filters insignificant price moves or noise and focuses on what price is doing. Renko in Japanese means brick, that is why these charts are also known as Brick charts.
The method of plotting Renko charts is slightly different compared to the traditional candle or bar charts. Renko charts are constructed or plotted by connecting two prices.
Below is the image showing a simple line chart that is drawn by connecting closing prices. Price dots at 100 and 105 are connected by the line.
Instead of connecting lines, Renko chart connects both the prices by drawing a box as shown in the image below.
The box drawn by connecting both the prices is called a brick, hence the chart name - Renko. So every brick would represent two prices - hence a brick has a high price and a low price. In the above example, low price of the brick is 100 and high price is 105.
Brick shown above is bullish because price is going up, hence 105 which is the high price is the current price. Typically, bullish bricks are drawn hollow while bearish bricks are filled with colour. Charting software may use customized color coding for the bricks, which is fine as long as difference between bullish and bearish brick is easily identifiable. In this book, hollow bricks represent bullish price action and colored or filled bricks means bearish price action.
In the same example, if price goes higher further to 110, another brick is drawn diagonal to previous brick starting from its top right corner.
In the new brick which is also bullish, low price is 105 and high is 110. Note that 105 is high price of previous brick, and we drew current brick starting from that price.
Another bullish brick will be drawn in the similar manner if price advances further, see below image.
Low price of recent brick is 110 and high price (recent price) is 115. Bricks will be formed in the similar manner if price keeps moving up. But if price moves down and falls below low price of the previous brick, we need to draw the bearish brick. In the example shown above, current price is 115 and low price of the brick is 110. To call it a reversal, price has to move below 105 which is the low price of the previous brick.
Below is the image showing bearish brick if price falls below 105.
Bearish brick is drawn diagonal to the bottom right corner of the previous brick. It is normally filled with colour such as black or red so that we can easily distinguish between bullish and bearish bricks. In the above example, if price falls more and goes below 100 then another bearish brick will be drawn starting from the bottom right corner of current bearish brick. If price moves up above 115, bullish brick will get plotted from top right corner of current brick.
The Renko charts are helpful in removing noise from the data. This is achieved by defining the “Brick Value. In the above example, notice the difference of 5 points, which is the Brick Value used in this case.
By defining the Brick Value, the user can decide the price action that is significant enough to be captured in the chart. In our example, a brick will be plotted only when price has travelled by at least 5 points which is the chosen Brick Value.
So if price moves from 100 to 105, a bullish brick is formed. Brick will not be formed if price is even one tick below 105 So if price is at 104, the Renko charts will not move. Hence by defining the brick value, we decide the frequency of bricks and the noise that we want to eliminate.
Above chart can also be drawn by using other brick values but the principle remains same. We will discuss how to decide the brick value. Before that, notice in the last example that because it is a 5 brick value chart, the next bearish brick will be plotted if price goes to 100 and a bullish brick will be plotted if price goes to 115.
So rules for forming the bullish or bearish bricks are clear and objective. Objectivity and noiselessness are two most important advantages of Renko charts, besides their visual appeal.
For clarification, if next bullish brick is to be plotted at 115, we'll plot it also if price touches 115 or exactly at the same price. If bearish brick has to be plotted at 105, we'll plot it also if price touches 105.
Let's do an exercise to build a Renko chart to be comfortable with basics. Below is a price table to plot 10 brick value Renko chart. I recommend serious readers to try it first on the table given below it. Explanation to plotting of every price is followed thereafter.
The method we adopt to plot Renko chart is that we define the scale as per brick value chosen to keep it a round number for better readability. If we choose the brick value as 10, the scale used will be 100, 110, 120 and so on.
Let's begin with the first price. We cannot plot first price simply because we don't know whether we need to start with bullish brick or bearish brick. Because it is a 10 brick value chart, if price goes up by 10 points we'll begin with bullish brick and if it goes lower by 10 points, we'll start with bearish brick. Renko chart cannot be plotted with just one price, hence we'll wait for another price.
Second price is 110.20,meaning that is going up. Hence we begin with the bullish brick and draw it as shown in the image below.
Number '2' written above the brick is a price series number for the reference.
Next brick will be plotted if price goes to 120 or fall below 90 (low price of previous brick), any price that occurs between these two is insignificant and considered as noise for this brick value Renko chart.
Third and fourth price remains between the two levels and doesn't allow plotting. Fifth price has gone above 120 hence bullish brick needs to be plotted. Sixth and Seventh price doesn't allow plotting before eight price that falls below requirement of bearish brick price level.
Ninth price allows reversal from bearish to bullish brick when price moves back above 120. Next bullish brick level is 130 and bearish brick level is 100. Eleventh and twelth price remain between the band. Thirteenth price allow bullish brick when moved above 140. Fourteenth price doesn't allow plotting. Below is the status of plotting so far.
If you can follow the plotting so far, the rest of the sequence should be easy to comprehend. As an exercise in learning to plot Renko chart, please use the data given the table below and plot the remaining price action and check with the chart displayed below.
The chart shown above is real time daily closing prices of Hindalco between 2013 and 2014. Below is the chart showing the same.
High - Low Renko chart
We plotted Renko chart with closing price in the method shown above. As observed earlier, Renko charts can be plotted with only one price.
A.W. cohen did remarkable job in the field of Point & Figure charts when he devised the high-low method of plotting them in his brilliant work during late 1950s. Same method can be implemented for plotting Renko charts as well. Instead of closing price, High and low prices of a particular period can be utilised for plotting the chart. To plot Renko charts with this method either high price or low price of a particular period needs to be considered. The rules are as follows:
- If price forms new high and qualifies for next bullish brick, the low price is to be ignored and bullish brick is to be plotted connecting the high prices
- After forming a bullish brick, if price doesn't form new high price to qualify the bullish brick, then consider the low price of that period to check whether criteria for formation of bearish brick is fulfilled, if yes, plot bearish brick. if no, move on.
- If price forms new low price and qualifies for bearish brick, consider low price of the next period first to check whether another bearish brick can be formed. If yes, form a bearish brick. If no, check high price of the period to check whether reversal criteria is fulfilled.
Hence, with this method, we consider high price first if last brick was bullish and low price first if last brick was bearish.
Below is a price table and chart showing brick wise explanation of construction of High-low Renko chart.
High-low Renko charts are more dynamic and more aggressive.
One key difference between Renko and P&F chart is that we don't have to define the reversal method /value in Renko chart. We only need to define Brick value to plot the Renko chart which makes decision making quite simple.
to download E-book on Renko Chart Analysis