How to understand a Renko

chart?
Most traders are using time-based charts for their trading needs. But let's think about,
what really matters in trading - price!
 How Renko charts are created
 Main advantage of Renko chart is filtering out the noise
 Why are Renko superior to time-based charts
 Errors you should avoid
 Different forms of Renko charts
 Conclusion
It's all about this one-dimensional value. There is no need for the time dimension, as
the price is not dependent on time. Whether it took the price to form new high hours
or even days, all a trader cares for is eventually the price. This is, where Renko bars will
come into action.

Renko charts were invented by the Japanese and are thought to be named after the
Japanese word Renga, which can be translated as "Brick". Some years ago, they were
marketed as Point and Figure charts, with a time axis, because the bricks are shifted to
the right, as it happens with time-based charts, once a brick is complete. Time and
volume are not included with these form of charts.
Renko charts address the most important value – the price – perfectly, as they
are time independent. Let us look how they are constructed and why they are
independent of time first.

How Renko charts are created

The basic element of a Renko chart is a brick. It can be seen as a bar, but with the
difference, that it has a fixed size. This fixed size can be set to any value the trader likes
and will be the same value for up and down. As an example, we look at Figure 1.

Figure 1: Renko bricks are formed regardless of the amount of time, but only from a
distance
Let's discuss the methods to select an optimal brick size later. For now, we choose a
brick-size to be e.g. ten pips, assuming there are no bricks currently created on the
chart. At every change in the price of 10 pips in the up or down direction, a new up
brick (Dodger Blue color) or down brick (Indian Red color) will be created. The
timespan, which takes to create one brick, can be any from a few seconds to many
hours.

Let’s look at four different scenarios, which go into brick creation (we still use a brick-
size of ten pips for our scenarios):

Figure 2: Bullish and Bearish Reversals of Renko charts

 If there is an up brick before and the price will go up another ten pips, a new up
brick is be created
 If there is a down brick before and the price will go down another ten pips, a
new down brick is created (see Figure 2)
 If there is an up brick before, price needs to go down twenty pips, to create a
new down brick
 If there is a down brick before, price needs to go up twenty pips, to create a new
up brick (see Figure 2)
We can see from #3 and #4, that a price reversal is only occurring after double the
brick-size.

Main advantage of Renko chart is filtering

out the noise
The way, Renko charts are constructed, offers the big advantage of filtering out the
noise on the chart. Brick's open and close acts like a boundary for a price movement
within a given range, the brick-size. As long as the price ranges between these
boundaries, be it a few seconds or even days, no new bricks will be formed. This will
give us smooth, noise-filtered charts.

Taking advantage of noise-filtered charts

Noise on the chart can clutter up our charts very fast and block the view to spot
important market structure. Chart formations like double tops, trends, reversals and
consolidation areas can easily spot with a blink of an eye, as can be seen in Figure 2.

Why are Renko superior to time-based

charts
Like mentioned before, Renko charts take time out of the equation. As the charts are
only based on real price action, bricks will only be plotted, if there is a specific
movement in price. This filters out noise created by tight price ranges or congestion
zones. If there is no price movement at all, the charts will not get cluttered up by small
bars or Dojis like with time-based charts. There is no need to look for higher/lower time
frames like with time-dependent charts, as there is no time involved. A finer grained
chart can be produced by decreasing, a course gained chart by increasing the brick
size. Significant market structures can be seen at a glance, as every bar has the same
size and the open/close of future bricks can be easily be projected. The programming
complexity of indicators, strategies and pattern recognition is also eased with a
substantial amount, as any brick has the same size.

What Renko charts are not good for

Renko charts don't use volume at all. So any trader, which relies on volume or trades
would need to add some additional studies like Cluster (Footprint) chart type
mechanisms to them. The forming of a brick could take seconds or even days,
depending on the brick size. This might be an issue for traders, who rely on a
guaranteed time frame because a new bar will appear. Indicators, which rely on time-
based calculations, cannot be used for Renko charts, as there is no time factor involved,
but only a particular price range.

Price movement is the only variable for creating new bricks. So the timespan, in where
new bricks are created, can be very different throughout time. This can be seen in
Figure 3a and Figure 3b. The Renko chart has an irregular time-axis compared to the
Candle Stick chart, as price movement was not the same throughout the time span.
Figure 3a: Regular time axis has predetermined time intervals
 Figure 3b: Renko charts have irregular time axis

Errors you should avoid

Spreads/Brick size
Tight spreads are always to go for. So if you have direct market access, you should
favor it to spread markup. Tight spreads will allow closer stops and smaller brick sizes if
you are used to short time frames like M5 or even M1. Based on experience, your brick-
size should be at least five times, or even ten times, of your spread. If the brick-size is
not acceptable to the spread, the bricks won't give price enough room to breath and
bricks will be plotted because of the spread, and not necessarily overall price
movement itself. An example can be seen in Figure 4.

Figure 4: Spreads

Time aggregation vs. Ticks

If your trading platform supports plotting Renko charts based on ticks, always use it in
favor to time aggregation. Only tick based Renko charts will give you the full benefit of
correct price movement. Time aggregation creates Renko bricks after the time passed
you chose for the aggregation. E.g. if you choose one minute for your time aggregation,
all Renko bricks, that would have been created based on price movement, will be
plotted at once after one minute. The difference can be seen in Figure 5.

Figure 5: Time and Tick aggregations for Renko chart

Such a setup bring a time dependency into a time-independent chart type. This will give
wrong results for indicators and calculations as you can see in the dashed yellow line
having a different slope. Choose the minimum time aggregation your trading platform
supports if there is no tick support for Renko charts.

Redrawing issues
There are three ways of how Renko charts can be implemented and are offered by
various charting packages:

 Plotting starts based on an (artificial, when using other forms of Renko charts
than classic) open of the first historic quote. This leads to a problem some
traders have issues with: the shifting of bricks when refreshing a chart. This
happens, when some historical quotes have changed over time, and the base for
the first brick is not the same quote as before. E.g. your charting package shows
a maximum amount of 200 bricks. When a new quote is coming in, it has to
delete the last historical quote, and the Renko bricks are plotted based on the
previous quote. The refreshed chart has a greater amount of historical data and
the bricks will be plotted with a shift. This change is the difference between the
price difference between the prior and the new quote.
 Plotting starts at a price selected by the trader. E.g. the parity price of a currency
pair (EUR/USD with a price of 1; USD/JPY with a price of 100). The selected price
level will act as artificial open for the first Renko brick. All other bricks will be
plotted backward and forward from the first brick. As the price is always the
same, regardless of the size of the price history, the chart always looks the same
after refreshing the chart or altering the historical data range.
 Plotting from the last incoming, real-time quote backward for a specific amount
of bricks. This also ensures the chart not to be shifted after a refreshing, as the
complete history will be processed from the actual quote to the last and the
base for the first brick will be the most up-to date quote, which was a correct
open of a brick formed in the past.

Different forms of Renko charts

Classic Renko chart
This form just stacks the individual bricks on top or below of each other as seen in
Figure 3b. With this form, pullbacks are not smoothed out that much and reversals are
harder to spot than with other types.

Median Renko chart

The Median Renko chart or Mean Renko chart has an artificial open shown with a
yellow dashed line as seen in Figure 6. This open is in the middle of a Brick. When a
Brick is closed, there will already be the half of the new Brick plotted on the chart.
Median Renko smoothes out the chart more than Classic Renko. They will show fewer
pullbacks and trend reversals are easier to spot as seen in Figure 7.

Figure 6: Formation of Median Renko chart

 Figure 7: Median Renko in PTMC trading platform

Geometric Renko chart

The Geometric Renko has an artificial open shown with a yellow dashed line as in
Figure 8. This open is at the extension and inversion percentage, e.g. 12% of the brick,
seen as the light blue color of the second brick in Figure 8. An extension and inversion
value of 50% would create Median Renko bricks.

One special property of these Renko form is, that when using an extension and
inversion percentage of 12.5%, the slope of up-bricks will be 45° and for down bricks
-45°. As seen in Figure 9, Geometric Renko will give you very smooth reversals, and the
charts are smooth out more than with Median Renko.

Figure 8: Formation of Geometric Renko chart

 Figure 9: Geometric Renko in PTMC trading platform

Turbo Renko chart

The Turbo Renko has an artificial open shown with a yellow dashed line as seen in
Figure 10. This open is at the extension, e.g. 12% of the brick, seen as the light blue
color of the second brick in Figure 10, but with an inversion of 100%. The difference to
Median Renko lies in the inversion percentage, which has a value of 100%. This
smooths out the majority of pullbacks and only shows high probability reversals as
seen in Figure 11. Price has to reverse by a complete brick to form a reversal, illustrated
as the dashed bricks in Figure 10.

Figure 10: Formation of Turbo Renko chart

 Figure 11: Turbo Renko Chart in PTMC trading platform

Conclusion
As you can see, there are multiple different forms of Renko charts besides the Classic
form. Each of it can be used for various needs like smoothing out noise, smoothing out
pullbacks or emphasize on reversals. The common between all of the forms is their
independence to time, their ability to smooth out the chart and the possibility to spot
market structure and price patterns at a glance.