Renko charts abstract from time and are plotted purely based on price movements. Thought to be named after the Japanese word for brick (renga), renko charts are similar to Point and Figure charts that are widely used in the Western world.
What is a Renko Chart?
Renko charts are made up of candlesticks that look like bricks.
When the price moves a fixed amount (usually the Average True Range), a new brick is formed and is added to the chart at a 45-degree angle. The noise is filtered out and these charts clearly show the trend in an asset’s price.
While standard candlestick charts and renko charts both paint green/red candles and display wicks, there are several important differences:
- While both charts can be plotted with a time axis, whether or not a renko is formed depends solely on the price action. Therefore, the distances between renkos are unrelated to time. A renko candle could take an hour, a day, or even a month to form, depending on how the chart is configured.
- The renko chart paints candles (or more appropriately bricks) of the same size,with the most commonly used method to standardise the size of the renkos is the Average True Range (ATR). You could use any number you want though and find an optimal figure through back-testing.
To get an idea of how renkos work, suppose you are trading the daily chart and there is an uptrend in the price of bitcoin. If the previous renko (or brick) opened at $9,000 and closed at $9,500, it would be green (assuming the Average True Range is $500).
Another green renko is not formed unless the price is above $10,000 at the end of the trading session, i.e., at the end of the day. A red renko is only formed after a green one if the price is below $8,500 at the end of the day.
How to Use a Renko Chart
Renko charts are easy to use with two main strategies.
- After a series of renko candles of one colour (e.g., red), a change in the colour of a renko (e.g., to green) highlights a potential trend change. You can buy on the appearance of the first green renko after a series of red ones (or sell on the first red renko after a series of greens).
- The other strategy involves breakouts. Renkos offer support and resistance levels and often displays double bottoms/tops. If they are broken, we can expect a strong movement in that direction.
The biggest advantage of the renko chart is that the price action is simplified to capture trends and reversals.
The renko chart for the daily timeframe for BTC-USD is shown below. It is important to note that as the Average True Range changes over time, the historical price action will also change.
As with candlestick charts, a green candle shows appreciation in the price while a red candle shows a decline in the price. The main signal used for renko charts is when a candle of opposing colour to the current trend is formed.
For instance, during February after a series of red renkos, a green brick formed. On the close of that renko (at $7,583.84), we should have entered a long position. We would hold onto that position as long as there are green renkos being formed on the chart.
The signal to exit a long position is when the first red renko appears. The first red renko is painted on the chart during late February with a closing price of $10,341.60 — producing a profit of around $2,800 for each BTC traded.
Similarly, we can also go short once a red renko is formed after a series of green renkos. When the price reversed at the end of February, the first red Renko would have suggested a short at $10,341.60. The close of the next green candle is at $10,341.60 and we would have broken even (not including any trading fees).
In early March, another signal to short was suggested by the renko chart, with an entry at $10,686.32. The market continued downward until displaying a green candle with a closing price of $8,618.00, making this signal very profitable with around $2,060 in profit per BTC traded.
The chart above shows more examples of the reversal strategy, using renkos to enter a long position or short position.
Stronger Confirmation with Renkos
It is important to note that renko charts sometimes give fake signals.
Back-test different configurations and adjust the size of the bars to optimise your trading performance with renko charts.
Another tip for more reliable signals is to give more weight to reversals that occur at important support/resistance levels, at daily/weekly highs or lows, or areas with a high trading volume/high-value nodes.
Alternatively, you could wait for two renkos to be formed in the opposite direction of the prevailing trend before closing or entering a position.
For instance, the chart above shows several examples of a fakeout occuring during a strong uptrend, where a single red renko was posted but the uptrend continued.
On August 29, the chart painted the first green renko after a series of red bricks, which would have given a signal to enter a long position around $9,508.98.
But after three green renkos, the first red brick forms — a signal to sell.
However, the uptrend continues and the red renko was followed by a green one. Similarly, on September 3, another single red renko appeared, but the uptrend continued.
To avoid these fakeouts, we could exit the long position once two consecutive red renkos are observed (instead of just one).
Notice that on September 4, two red renkos had formed which gave stronger confirmation of a reversal and provides a clear signal to exit the long position at $10,533.90. If you had taken the first red renko signal to sell, you would have missed out on most of the upward move. The trade would have been closed at a price that was around $1,000 lower.
The example above illustrates why you may want to wait for further confirmation when a renko is formed in an opposing direction to the prevailing trend. One way to obtain confirmation is to wait for not one, but two, renkos in the opposite direction.
Resistance and Support Levels
Renko charts also clearly identify support and resistance levels.
The chart below for ETH-USD shows an example of how you can use renkos to plot support and resistance.
The price peaked at $276.00 and the market went on to break above this resistance but did not manage to last long above this level. The price then bounced down from this resistance level before breaking through the resistance. After the price is above the resistance level, $276.00 turned to support.
We see that the price respected the resistance turned support level in early July, as ETH-USD bounces from $276.00 to eventually reach a high above $300. However, the support level was broken in early July and turned back into a resistance level, with the price testing this level immediately after, providing a good opportunity to short ETH-USD.
We can also trade breakouts of the renkos, like we would with candlestick charts.
The 4-hour chart of ETH-USD shown below illustrates the breakout strategy that can be utilised with renko charts. For the breakout strategy, we look for two renkos of the same color that have the same closing price. Once another brick has been added, then we have a breakout as highlighted below.
We see that a green renko closed at $295.32 but then the direction reversed and printed a red candle. The price then continued higher with another green renko closing at $295.32.
We can also think of this as a Double Top. In fact, many chart patterns found with standard candlestick charts are displayed by renko charts, such as the Head and Shoulders pattern, the Double Bottom and the Double Top.
Once another green renko builds upon the second candle that closes at $295.32, we have a breakout and we’d want to enter a position in the direction of the trend.
Therefore, we would have entered around $298.08, the close of the second green renko. The long trade would have been profitable, as the signal to exit occurred with the first red renko, which closed at $309.12.
Advantages of the Renko Chart
Renkos can be used on any timeframe, but be aware that longer timeframes will require more patience. For example, on the daily timeframe, wait until the end of the day to look for any signals or reversals in the trend of the Renko chart. Whatever strategy you use, make sure you stick to your trading rules and be consistent.
If you are new to trading, renko charts are a good introductory tool as they are straightforward to interpret and illuminate the underlying trend. Standard candlestick charts can often be messy to look at while with renko charts, trends and periods of consolidations are easier to spot.
Renkos can also teach you desirable traits for a trader, specifically patience. Given that you have to wait for the candles to change colour, more trading opportunities will be given if you look at the 4-hour and 1-hour charts (or even lower timeframes). Because these charts do not incorporate a time element, a trader following a strict set of rules with a renko chart will be less tempted to make impulsive decisions.
As renko charts are straightforward, risk management becomes a lot easier. For instance, you can set yourself some rules, entering a trade when there is a switch of the renkos and exit when the renkos switch back again (or wait for a second renko for further cofirmation). Or you can use the open of the most recent renko as a stop loss and move it up or down as the market moves.
Drawbacks of the Renko Chart
While it is a strength of renko charts, the abstraction from time can also a weakness.
If the price is trading sideways, no new renkos will be formed until there is a breakout which may be a drawback for some traders. While renkos reduces the amount of noise on the chart, it also means that confirmation of a breakout may take a big longer.
On the other hand, because new renkos are pained on the chart when the price of bitcoin moves a certain distance, you will not be able to catch all of the trading opportunities provided by the renko chart since you’ll need to eat, sleep and so on.
Renko charts look easy to follow, but the market needs to move twice the distance to get an exit signal as compared to a continuation. Consider the two following scenarios:
- In the first scenario, you enter on a green renko. If the market forms a red renko straight after that, you will be at a loss. As mentioned above you might want to wait for two renkos to form in the opposite direction before entering a position.
- In this scenario, let’s say you enter on a green renko. Another green one follows, but then there is a red renko (in the opposite direction). You will have not acted on the reversal until the red renko formed (at breakeven point). You could have sold on the second green but the renko chart was telling you that an uptrend was in place.
The point is that you will never be able to capture the entirety of any move, even though the charts are aesthetically pleasing.
Another issue is determining the size to use for the individual renkos. While we have already mentioned using the Average True Range, this may not be the most effective configuration depending on which timeframe and instrument you are trading. Scalpers and day traders might want to reduce the size of the Renko from the default setting. Make sure you back test different Renko configurations to see which size is best suited to the instrument you are trading and your trading style.
Finally, indicators behave differently when applied to renko charts as compared to a standard candlestick chart. Indicators such as MACD are rendered pretty much useless, although others like volume and the volume profile can enhance your analysis of renko charts.
The renko chart is a powerful tool for traders, which can be used to identify trends and reversals. Chart patterns and support/resistance levels are also clearer on these charts providing traders with a broader, long-term view of the market.
In combination with traditional candlestick charts and Heikin Ashi charts, the probability of a winning trade is improved as considering alternative techncial perspectives of the market provides a more complete picture of the market.
To read more about Renko charts, check out Steve Nison’s book Beyond Candlesticks: New Japanese Charting Methods Revealed.