CONSTRUCTION OF RENKO CHARTS


Let us begin by understanding how Renko charts are constructed. This is a

most important and fundamental aspect. Readers are often more interested in

immediately getting to the trade setups; they don’t focus enough on the basics

and struggle later in grasping the nuances of trading strategies. I urge you to

spend enough time in understanding the basics before moving on to chart

patterns and trading.

The method of plotting Renko charts is slightly different as compared to the

plotting of traditional candle or bar charts. Renko charts are constructed, or

plotted, by connecting two prices. The method is explained step-wise below.

Figure 1.3 is the image of a simple line chart that is drawn by connecting

successive closing prices. In the chart in Figure 1.3, the closing prices at 100

and 105 are connected by a line.


Instead of connecting the closing prices with a line, a Renko chart connects

the two prices by drawing a box as shown in Figure 1.4.

The box drawn by connecting the two prices is called a brick. So, every brick

would represent two prices, a high price and a low price. In the example in

Figure 1.4, the brick’s low price is 100 and its high price is 105.

The brick shown in Figure 1.4 is bullish because the price is rising. Typically,

bullish bricks are drawn hollow while bearish bricks are filled with colour.

The charting software may use customized colour coding for the bricks,

which is fine so long as the difference between a bullish and a bearish brick is

easily identifiable. In this book, hollow bricks represent bullish price action,

and black, or filled, bricks represent bearish price action.


Continuing the example of Figure 1.4, if the price goes up to, say, 110,

another brick would be drawn diagonal to the existing brick, starting from the

existing brick’s top right corner (see Figure 1.5).


The second brick plotted in Figure 1.5 is also a bullish brick as the new price has closed above the previous brick’s price level. The low price of the new

brick is 105 and the high price is 110. Note that 105 is also the high price of

the previous brick, and we drew the current brick starting from that price.

Another bullish brick will get drawn in the same manner if the price advances

further (see Figure 1.6).

The low price of the latest brick (Brick 3 in Figure 1.6) is 110 and its high

price is 115. Further bricks will be formed in the same way if the price keeps

moving higher. If the price starts moving down, however, and falls below the

low price of the previous brick, we need to draw a bearish brick.

In the example in Figure 1.6, the current high price is 115 and the low price is

110. For a reversal, the price has to move down to 105, or below that, which

is the low price of the previous brick.


Figure 1.7 shows that a new bearish brick is drawn diagonal to the bottom

right corner of the previous brick. In the example of Figure 1.7, if the price

falls even further and goes below 100, then another bearish brick will get

drawn, starting from the bottom right corner of the current bearish brick. On the other hand, if the price moves back up above 115, a bullish brick will get

plotted from the top right corner of current brick.


Based on the above discussion on brick construction, you will readily

appreciate that the level where a continuation, or a reversal, brick will get

plotted is known in advance. For instance, in the case of the Renko chart in

Figure 1.7, you know the price levels where bullish or bearish bricks will get

printed. This is an important aspect from a trading perspective which we will

discuss further in the coming chapters.

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