RENKO CHARTS

 Renko Charts

Renko is a charting method that belongs to the “noiseless” category, i.e. a

chart which is free of relatively minor price moves. Apart from Renko, other

noiseless charting methods include Point and Figure, Line-break and Kagi.

Renko charts have their origins in Japan where they were used during the

19th century. They were introduced to the rest of the world by Steven Nison

who discussed this methodology in his book, Beyond Candlesticks.

In Japanese, Renko means brick; that is why Renko charts are also known as

brick charts. A Renko chart is categorised as noiseless because it eliminates

insignificant price action. Also, the Renko chart is a one dimensional chart

because its plotting only takes price into account. On the other hand, popular

charts, such as bar or candlestick, have two dimensions — price and time. In

two dimensional charts, price is plotted on the Y-axis and time on the X-axis.

A new price point gets plotted on the chart when the specified time passes by,

irrespective of the extent of the price move. A Renko chart, on the other

hand, filters out insignificant price movements and captures only significant

price action. The elimination of noise is achieved by selecting a suitable brick

value. We shall discuss more about the brick value a little later.

Simplicity and objectivity are the major advantages of Renko charts. Renko

is a complete charting system that is objective in nature and applicable on all

types of financial instruments and over all time frames. Recent advancement

in technology has made it easier to plot and study patterns in a Renko chart.Besides, the technology today offers the facility to plot log scale Renko

charts, but more about that later.

As you go with the flow and process of this book, you will understand all

aspects of Renko charts and you will be able to trade any instrument on any

time frame.

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LOG BRICK VALUE

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In the earlier examples, we discussed the plotting of Renko charts using absolute brick values, such as 5 or 10. Actually, Renko charts can be plotted with any number. But often a chart moves in a wide range which makes defining the brick value difficult. Take, for instance, a stock like Aban Offshore that was trading at 5,000 in January 2008 and subsequently crashed to 300 in March 2009, and then traded below 200 in January 2016. A brick value of 50, when the stock was trading at 5,000, would have represented 1% of the prevailing price. But if the chart were plotted with the same brick value when the price had dropped to 200, the brick value of 50 would represent 25% of the prevailing price. This example illustrates the problem associated with using absolute brick values for Renko charts, especially when studying a long term chart. There are many examples of stocks moving in a wide price range where it would be illogical to use a single brick value to sensibly capture the price action
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BRICK VALUE TWO

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  The ninth price (see Table 1.4) triggers a reversal from a bearish to a bullish brick as the price moves back above 120. The next bullish brick level is 130, and the subsequent bearish brick level is 100. The eleventh and twelfth prices remain between the bands, so no bricks. The thirteenth price warrants plotting a bullish brick as the price moved above 140. The fourteenth price doesn’t allow plotting. Table 1.4 summarises the status of the plotting thus far, and Figure 1.10 is the resultant Renko chart . If you have followed the logic behind the plotting so far, the rest of the sequence should be easy to comprehend. The remaining price action is illustrated in the chart in Figure 1.11. The chart shown in Figure 1.11 is actually based on real time daily closing prices of Hindalco between 2013 and 2014. Figure 1.12 is the chart showing the same.
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