Compositedge E-learning- Renko charts

The Renko chart is a kind of aggregation chart developed by the Japanese using price movements while ignoring time and volume. Renko is taken from the Japanese word “Renga” meaning bricks which is typically represented in the way the chart looks. There may be a few features in the chart type which are very similar to some of the other aggregation chart types like the Point and Figure and Heikin-Ashi, however, a deeper understanding points to quite a few differences. One key difference is the bricks or boxes in Renko charts are placed at an angle either at the top or bottom of the previous column, whereas in the Point and Figure charts the columns are plotted directly next to the previous one.
Likewise, the key difference between a Renko and the bar/candlestick chart is the appearance. While the bar or a candle can be of any size depending on the price movement during a particular timeframe, the brick size of Renko charts are uniform, giving them a smoother look.

Building a Renko chart-
The basics to constructing Renko charts is choosing the “box or brick size” for a security. If the minimum price movement of a security is ₹0.05 and you want to have a brick size of ₹5.00, your brick size would be 100 if you’re using a Protrader platform. What this means is every time the price of a security moves in the direction of the existing trend by ₹5.00, a new box/brick will be formed. Likewise, if prices move in the opposite direction by twice the value or ₹10.00 in this case, a new brick with an alternate colour will be displayed.
Secondly, there are different methods used to calculate bricks. All charting softwares generally offer a basic or classic technique where the brick size is required to be manually defined by the user for each security individually. However, some platforms also provide alternates such as Average True Range, or High/Low where the brick size is already designed and ready to be implemented.

  • Classic: Uses the absolute value of the last traded price to calculate brick size. Based on your pre-defined input, new bricks will be added when the price of the underlying moves atleast to the extent of the brick size defined in your input parameter. Although this is a straightforward method to calculate blocks, it involves some amount of analysis to select brick sizes for different instruments, since one size may not fit all.
  • Average true range (ATR): Uses values estimated by ATR, an indicator developed by Welles Wilder to measure volatility.
  • High/Low range: It includes two data points unlike the classic method which uses only one, thereby increasing the number of bricks plotted in comparison to the classic method.

 

Illustration of Renko chart on the Compositedge- Protrader trading terminal

 

Trading signals-
Renko charts can be used to define supports/resistances and breakouts. As a trader, you can follow simple technical analysis rules like higher tops-higher bottoms or check out classic chart reversal patterns like double tops/double bottoms to time entries and exits. Trading signals can also be captured by including technical studies or oscillators as secondary indicators.

 

Conclusion-
Since Renko charts do away with the time factor, they successfully filter out small price movements and false signals, making it easier to spot trends, but on the flip side traders generally tend to lose out on some of the price action due to the delay in reporting trends. The key feature of Renko charts is the size of the brick which will determine the probable entries and stops to be placed. Generally, larger bricks entitle larger stops while smaller bricks lead to greater price sensitivity. Although there are no pre-set rules to govern block sizes, traders typically use one percent of the price of the security as the brick size. However, it’s advisable for users to experiment various block sizes depending on the volatility of the underlying security before arriving at the right value that best describes the trend.

 

 

Compositedge, incorporated in 1995, is a leading discount broker and provider of algo trading solutions for retail customers in India. Headquartered in Bangalore, we provide the internationally acclaimed Protrader platform which comprises of charts, scalper, matrix, grid, time & sales, market-depth and options master in addition to the state of the art algo trading platform. We combine discount broking and algo trading solutions to ensure all our retail clients experience the finest trading amenities at affordable costs.