Visualizing changes in asset values makes it easier to track trends. This is why Eastern analysts were not satisfied with traditional candlesticks and created alternative ways of representing price changes.
One of them is the Renko charts designed to simplify trading by reducing market noise. Today I will tell you what Renko bricks are, how to work with them, what signals they can provide, and how they can help in trading.
WHAT ARE RENKO CHARTS?
Renko is a type of chart for displaying asset price movements. This is an alternative to Japanese candlesticks in representing price changes.
The Forex Renko chart looks like two-colored bricks of the same length and width, where each subsequent brick is either higher or lower than the previous one.
The EURUSD chart shows an example of what Renko looks like. Please note that, unlike Japanese candlesticks, the bars, or rather bricks, are drawn without shadows. Although in some variations, Renko bars may also have wicks. But the traditional Renko looks exactly like this.
Renko charts, like Heiken Ashi, show price movements free from minor fluctuations. Filtering makes trend detection easier. The bars are the same size because time is not taken into account in the system.
Usually, you specify the size of one brick in the settings along with the formation period. It represents the number of points that the price must pass in order for the indicator to draw one bar.
The larger the size, the less movement, but the higher temporary deformations and smoothing. Therefore, a smaller brick size increases the sensitivity to volatility.
I will give an example for a better understanding. For instance, you have specified the size of the smoothed brick as 20 points in the trading terminal settings.
This means that each bar will be drawn when the asset value changes by 20 points. It can happen in a minute, in an hour, in a day, or in a month - time does not matter.
In the picture above, I’ve marked the bricks formed from March to April with a blue rectangle, and from April to May with a red one. If we count them, it turns out that 19 bars were formed in March, and only 4 in April.
Renko perfectly demonstrates how the Pareto rule works. Let me remind you that in trading it boils down to the fact that about 80% of the time the markets are in a state of expectation or flat.
During this period, trading is ineffective. And only in the remaining 20% of the time there are significant trends that can bring tangible profits.
Important! In MT4 and MT5, you can add these charts only as an indicator Renko, which is superimposed on top of regular bars.
It also needs to be downloaded from the community portal and installed separately as an add-on. This is why I prefer to view the Renko chart in LiteFinance online terminal.
Here you can select this type of chart without any additional settings. In this case, the bricks completely replace Japanese candles, which is very convenient.
HISTORY OF RENKO CHARTS
Brick charts were invented hundreds of years ago by rice traders. Rather than recording every price movement for their product, the merchants made up a system to record only important changes. This way they saved their time, paper, and ink.
There are two translations of the Japanese word Renko: "brick", as I’ve mentioned above, and "quiet path". The second option reflects the essence of these charts as a slow-paced smoothed model of price changes, in which there are no sharp insignificant movements.
While they used to be plotted manually on paper, with the introduction of digital systems they are now constructed in automatic or semi-automatic mode.
In the financial literature, the first mention of Renko is in the book Beyond Candlesticks by Steve Nison. In it, the financial analyst described the principles of building the bars and working with them and talked about the basic Renko strategies that are still used on Forex by many traders.
RENKO BARS (BRICKS)
Like Japanese candlesticks, the Renko bricks can be ascending and descending. The classic coloring for bricks during growth is green or white, and during decline - red or black.
A new bar is formed when the value of an asset changes from the last fixed value by an amount greater than the bar size, or threshold. The threshold is measured in points and specified in the settings. In the classic version, it is about 1% of the current price.
The default settlement price is the closing price. But if necessary, the investor can rely on any parameters. For example, some traders calculate from highs or lows on small timeframes.
An ascending bar forms when from the moment of the last close, the price has increased by a value greater than the specified threshold over a period of time within the chosen timeframe. A descending bar forms when the price has decreased by a value greater than the specified threshold.
In this case, the number of new bricks will be equal to the multiplicity factor of the price change to the specified threshold.
So a brick can contain any number of periods of minor price fluctuations. For example, with a threshold of 10 points, a price increase from 100 points to 108 and a subsequent fall to 105 will not be reflected in the chart in any way, since these changes did not go beyond the specified threshold.
However, when the price surpasses the 110-point mark, a new upward bar will form. Or if it breaks the 90-point mark, a new downward bar will appear in the chart.
The appeared brick can disappear if the price has time to roll back within a given period of time. This means the bricks are fixed only at the close of the period. For example, for the daily timeframe, they will be fixed at the close of the trading day, and for W1 - after the end of the trading week. Continue reading with Litefinance.com...
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