How to use Renko charts in stock trading

What are Renko charts?

Let’s start with the basics: what Renko charts are, how they’re constructed, and their unique features.

Definition of Renko charts

Renko charts are a type of trading chart that focuses only on price movement rather than time. Unlike traditional charts that plot price changes at regular time intervals, Renko charts create ‘bricks’ only when the price moves by a set amount. This helps traders filter out minor fluctuations and focus on meaningful price trends.

Origin of Renko charts

Renko charts were developed in Japan during the Edo period (1603-1868) and were first used to track rice futures. Their name comes from the Japanese word ‘renga’, meaning ‘brick’, since the charts look like a series of stacked bricks.

Construction and characteristics of Renko charts

Renko charts are built using bricks that represent fixed price movements. Each brick is placed at a 45-degree angle to the previous one, either up or down depending on the price direction. Bricks are never placed side by side, which makes it easier to spot trends.

The size of each brick, known as the box size, determines when a new brick will appear. Traders can set a fixed box size (e.g. $0.10, $1, or 10 pips) or use the Average True Range (ATR), which adjusts the box size based on market volatility.

A smaller box size creates more bricks and highlights short-term price swings and reversals, while a larger box size smooths the chart, reducing noise but making it slower to detect trend changes.

How do Renko charts work?

Now that we’ve looked at the basics of a Renko chart and how it’s constructed, let’s dive deeper into how they work.

How Renko charts are calculated

A new brick is only added to a Renko chart when the price moves at least the box size beyond the last brick’s high or low. For example, if a stock with a $0.25 box size moves from $15 to $15.25, a new brick is formed. If the price only reaches $15.24, however, no new brick is added. Once a brick is drawn, it remains on the chart and is not removed.

Renko charts do not use fixed time intervals. Some bricks may take days or weeks to form, while others appear within minutes, depending on how fast the price moves. Because Renko charts ignore small price movements, they help traders focus on clear trends and support/resistance levels while filtering out market fluctuations.

Close versus high-low range

Renko charts can be constructed using closing prices or the high-low range:

• Closing price: This approach only uses the closing price of each period (e.g. daily or weekly) to determine when a new brick forms. Because it considers only one data point per period, it tends to produce fewer bricks and results in a smoother, less volatile chart.
• High-low range: The high-low range method takes both the high and low prices of each period into account. Since it considers two data points instead of one, the high-low range captures more price fluctuations and generally produces more bricks.

Fixed value versus ATR

The brick size in a Renko chart can be set as either a fixed value or as the Average True Range (ATR):

• Fixed value: This sets the brick size to a fixed amount, such as $1, 10 points, or 15 pips, meaning the size will remain constant regardless of market conditions. This can make it easy to analyze past price movements but may not always adjust well to changes in volatility.
• Average True Range (ATR): This sets the brick size based on the ATR, a volatility indicator that fluctuates over time. The default ATR setting is typically 14 periods, meaning the box size is recalculated as market conditions change. When volatility increases, the ATR value rises, leading to larger bricks. When volatility decreases, bricks become smaller, making the chart more responsive to market shifts.

How to read Renko charts

Traders often use Renko charts to identify trends, support, and resistance levels. Let’s take a look at how to read Renko charts.

Understanding Renko bars

Renko bars, also called bricks, are the building blocks of Renko charts. They make it easier to spot trends, support, and resistance levels, and reversals, without being distracted by small price movements.

Trends, support, and resistance

One of the most common uses of Renko charts is spotting trends and support/resistance levels. Because they filter out small price fluctuations, Renko charts can highlight support and resistance levels much more clearly, making it easier for traders to discover price breakouts and ride new trends.

In a Renko chart, bricks form in a continuous direction until a price reversal occurs:

• White/green bricks indicate a strong upward trend. Traders often stay in long positions until a red/black brick appears.
• Red/black bricks indicate a declining market. Traders may hold short positions until a white/green brick appears.

Two-brick reversals can indicate a potential change in trend. For example, if a stock has been forming white bricks in an uptrend but then prints two consecutive red bricks, it may suggest a shift to a downtrend.

How Renko removes the “noise” of markets

Renko charts remove the ‘noise’ of the financial markets by only adding new bricks when prices move by a set amount. This filters out small, insignificant price movements and helps traders focus on more meaningful trends. As a result, traders can potentially ride trends for longer compared to candlestick charts, where market noise can lead to premature exits.

How to use Renko charts in trading

If you're interested in using Renko charts in stock trading, we’ve outlined some tips to help you get started.

How to trade using Renko charts

Here are some basic techniques for trading using Renko charts:

1. Determine the Renko brick size: Before trading, you need to set an appropriate brick size. This determines the minimum price movement required to form a new brick. The ideal brick size depends on the asset’s volatility and the trader’s strategy:
   • Smaller brick sizes (e.g. 5-10 pips for forex or $0.10 for stocks) capture minor price movements, making the chart more sensitive to fluctuations.
   • Larger brick sizes (e.g. 20-50 pips for forex or $1 for stocks) help filter out noise and highlight major price moves, making it easier to follow longer intraday trends.
2. Identify the brick direction: Renko bricks change colour based on price movements:
   • Green or white bricks form when the price rises by the set brick size, indicating an uptrend
   • Red or black bricks form when the price falls by the set brick size, indicating a downtrend
   • A series of bricks in one colour confirms a trend.
3. Spot & confirm trend reversals: Changes in brick colour signal a potential trend reversal:
   • If a red brick appears after a series of green bricks, it may indicate the start of a downtrend
   • If a green brick appears after a series of red bricks, it could signal an uptrend
   • To avoid false signals, traders confirm reversals using technical indicators like moving average convergence divergence (MACD) or relative strength index (RSI).
4. Manage risk: To manage risk effectively, traders should:
   • Set stop-loss orders just below support levels in an uptrend, or above resistance levels in a downtrend
   • Adjust stop-loss positions as the trend develops to lock in profits while protecting against sudden reversals
   • Use trailing stop-losses to follow strong trends while ensuring that profits are secured if the market changes direction.

How to use Renko charts for intraday trading

Below are some helpful tips for using Renko charts in intraday trading:

1. Choose the right brick size: In intraday trading, it’s common to set the brick size between 0.5% and 1% of the asset price.
2. Identify price patterns & formations: Renko charts make it easy to recognise classic chart patterns, like support & resistance levels, trendlines, and reversal patterns like double tops, double bottoms, and triangles. Look out for these to identify entry and exit points.
3. Use indicators with Renko charts: Combine Renko charts with technical indicators, like moving averages, oscillators, and volume-based indicators, to get additional confirmation.
4. Apply technical analysis tools: Renko charts work well with technician analysis tools that can help identify trend direction and price targets. These include Fibonacci retracements, pivot points, and trend analysis.

Renko chart strategies

Renko chart scalping

Renko charts are useful for scalping strategies because they filter out market noise and highlight trends clearly. Scalping involves making multiple small trades throughout the day to capitalise on quick price movements.

Since Renko charts only generate new bricks when prices move by a set amount, they allow scalpers to focus solely on significant price movements. This makes it easier to identify trends and execute trades quickly. Unlike candlestick charts, the smooth visual representation of price movements in Renko charts reduces false signals and provides objective entry and exit points based on changes in brick colours.

That said, Renko chart scalping also has a few challenges. Since Renko charts don’t account for time, there can be delays in price updates, which can cause traders to miss short-term opportunities. It’s also crucial to select the right brick size – when bricks are too small, they can create lots of false signals, and when they’re too large, it can be easy to miss out on key trading opportunities.

Renko swing trading

Renko charts are also popular for swing trading, which involves capturing larger price movements over several days or weeks. Since Renko bricks only appear when the price moves by a set amount, they allow traders to stay in trades longer without being distracted by minor price fluctuations.

Traders using Renko charts for swing trading often remain in a long position as long as white/green bricks form, and exit when the first red/black brick appears. In a downtrend, traders hold short positions until the opposite-coloured brick forms. Some traders set a reversal threshold, where they wait for two or three consecutive reversal bricks to confirm a trend change before closing their position.

Renko charts also help traders define stop-loss levels more clearly. Because support and resistance levels are more visible, traders can place stop-loss orders just below support in an uptrend or above resistance in a downtrend.

Renko charts vs other chart types

Renko charts vs candlestick charts

One of the key differences between Renko and candlestick charts is that candlestick charts are time-based, meaning a new candlestick forms at regular intervals (e.g. every minute, hour, or day) regardless of how prices move. Renko charts, however, are price-based, meaning a new brick only appears when prices move by a set amount.

Candlestick charts are also more detailed than Renko charts, showing open, high, low, and close prices within a given time period. This makes them more complex and difficult to read compared to Renko charts, which focus only on significant price movements.

Renko charts vs Heikin Ashi charts

Both Heikin Ashi and Renko charts smooth out price action so it’s easier to identify trends, however they do so in different ways. While Renko charts create bricks based solely on price movement, Heikin Ash charts use an average of recent price movements to calculate each candlestick.

They are also time-based, with a new candle forming at regular intervals, unlike Renko charts which ignore time.

Line break chart vs Renko

Line break charts are similar to Renko in that they’re both price-based, however they have key differences. Renko charts create new bricks when the price moves by a predetermined amount, while line break charts form new bars only when the price closes beyond a set number of previous bars (usually three). This means that the number of bars displayed in a line break chart depends on price movement rather than fixed value.

Advantages and disadvantages of Renko charts

Advantages of Renko charts

The advantages of Renko charts include:

• Easier to identify trends: Renko charts make it easier to spot long-term trends by eliminating small price fluctuations. Since bricks only form when prices move at a set amount, traders can more clearly see uptrends, downtrends, and potential reversals.
• Removes market noise: Unlike candlestick or bar charts, which show every price fluctuation within a given time period, Renko charts filter out insignificant movements. This makes them popular amongst traders who want a clean view of market trends without being distracted by short-term volatility.
• Clear entry and exit signals: Renko charts provide straightforward buy and sell signals. When a brick changes colour, it signals a potential trend reversal, which can help traders time their entries and exits more effectively.
• Easy to read: Renko charts have a simple and visually intuitive layout compared to more complex chart types. Once traders understand how bricks are formed, it’s easy to interpret trends.

Disadvantages of Renko charts

Some of the disadvantages of Renko charts include:

• Limited information: Renko charts only display price movements and don’t include time, volume, or intraday price fluctuations. Traders who rely on candlestick patterns, wicks, or volume indicators may find Renko charts lacking in detail.
• Not always accurate: Just like other charts, Renko charts can send false signals in sideways or highly volatile markets by printing alternating red and green bricks. Traders need to confirm trends using additional technical indicators, like moving averages or oscillators.
• Choosing the right box size: Choosing the right box size is crucial for Renko charts, but isn’t always easy. Smaller box sizes create more bricks, making the chart highly sensitive but also prone to false reversals. Larger box sizes, on the other hand, reduce noise but also delay entry and exit signals.