What is a Renko Chart and How is it Constructed?

Derived from the japanese word renga (brick), the Renko Chart only indicates price movement, not time or volume. It is constructed by adding a brick to the next column when the price surpasses the top or bottom of the previous brick by a certain predefined amount. Therefore, the bricks are only drawn when the market has advanced/fallen by this predetermined amount. The bricks are always the same size. White bricks represent an uptrend, black bricks a downtrend.

Renko Chart Use

Renko Charts are effectively used to identify essential support and resistance. Reversal signals are generated when the the trend changes and the bricks change colour. They use closing prices. The first step, for the construction of the graph, is to determine which price is valid as a scale to be able to add the following brick. Once decided, that price is also applicable to the height of the brick. So, a five point Renko Chart will have bricks of the same height. Therefore, whatever the scale of movement taking place, the size of the bricks always remains the same.In the above case of five point bricks, a movement of twenty points will be shown by four consecutive bricks, black or white, according to either they represent up or downtrend. If the market rises more than the value of one brick but not enough for two, only one white brick is added. If the case is the opposite and the market falls less than the value of one brick but not enough for two, we only add one black brick. If the rise or fall is less than the fixed value for a brick i.e. between its high and low, no brick is drawn on the Renko chart.

What A Renko Chart looks like



Typically, an asset will be sold when a black brick is placed at the end of series of climbing white bricks. The signals generated when a black brick is followed by a white one indicate buying. The reverse situation indicates sale. However, false signals can be generated when the color of the bricks changes too early and a sawtooth effect is produced. There are limitations to its use.