INTRODUCTION TO RENKO CHARTS

 

Technical analysis can broadly be defined as the study of historical price

action of a financial instrument, commodity, currency, etc. that helps in

arriving at a reasonable conclusion about its prevailing demand and supply

equation.

The following are the basic tenets of technical analysis according to the

classic work, Technical Analysis of Stock Trends by Robert D. Edwards and

John Magee:*

1. Stock** prices move in trends, and a trend is deemed to continue until it

gets reversed.

2. Stock prices are determined by the interaction of demand and supply, and

the shifts in demand and supply cause reversals in trends.

3. The price discounts everything. Shifts in demand and supply can be

detected in charts.

4. Price history and chart patterns tend to repeat themselves.

Popular Charting Methods

There are many ways to capture, or chart, the historical price movement of a

financial instrument. The popular charting methods include line chart, bar

chart and candlestick chart. Figure 1.1 explains their construction.

Line charts are drawn by connecting closing prices of the chosen time

interval. In bar charts, a bar is bullish when its closing price is higher than the

earlier period’s bar; it is bearish when the closing price is lower than the

earlier period’s bar. In candlestick charts, a candle is bullish when the close

of a period is higher than its open, else it is bearish.


Figure 1.2 shows a typical candlestick chart. As you would observe, there are
two dimensions to the chart, namely price and time. In such charts, time is
plotted on the X-axis and price on the Y-axis.


A line chart is plotted by connecting successive closing prices. Breakouts and
patterns based on closing prices are relatively clear and noise free. This is perhaps the reason why eminent technical analysts such as Charles Dow,
John Murphy and many others prefer line charts over bar charts. Charles Dow
considered the daily close as the most significant price and relied exclusively
on closing prices. The usual line chart that plots only closing prices is one of
the oldest and most important methods of plotting prices. Also, as Murphy
argues, “Many chartists believe that because the closing price is the most
critical price of the trading day, a line chart is a more valid measure of price
activity.” *

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