What are Renko Bars and how do they work?
I will now explain some things about Renko Trading - a special chart style to trade Forex.
A type of chart, developed by the Japanese, that is only concerned with price movement; time and volume are not included. It is thought to be named for the Japanese word for bricks, "renga". A renko chart is constructed by placing a brick in the next column once the price surpasses the top or bottom of the previous brick by a predefined amount. This type of chart is very effective for traders to identify key support/resistance levels. Transaction signals are generated when the direction of the trend changes and the bricks alternate colors.
So Renko Bars are price bars with rising and falling diagonal lines of
boxes that are either filled or hollow. Renko Bars are NOT based on time
increments and they do NOT have consistently spaced time increments.
Renko Bars can be viewed as merely a different way to reflect price on a
chart. In my opinion they paint the clearest picture of price
available.
You can change the box size of a Renko chart by yourself. The smaller the size, the higher the number of boxes and so more details of the price changes. It´s important to note that prices may exceed the top (or bottom) of the current brick. Again, new bricks are only added when prices completely "fill" the brick. For example, for a 5-point chart, if prices rise from 98 to 102, the hollow brick that goes from 95 to 100 is added to the chart BUT the hollow brick that goes from 100 to 105 is NOT DRAWN. The Renko chart will give the impression that prices stopped at 100.
How can we use Renko Bars anyway? I could try to explain this in writing, but I feel a picture and a video is worth a thousand words. Below you will find a chart comparison for the Russell 2000 for June 15th, 2012. Both charts reflect the same time period; check them out...
How do Renko Bars work for daytrading? Once again, I could try to explain it in writing, but this video will give you a clearer picture.
A very common question is “what is the difference between Renko Bars and Range Bars”? "The range bar measures a set range of price movements and when that
range is met the bar prints. A renko bar does the same except the range
has to be all in one direction for the bar to print. So with a 10 tick
renko bar the range has to be all up or all down for it to print
Example: A 10 tick range bar could open at 100.00 and have 5 ticks up to
100.05 and 5 ticks down to 99.95 and the bar would print. A 10 tick
renko bar would have to have 10 ticks up to 100.10 or 10 ticks down to
99.90 before it would print.
So the benefits to both are when price moves quickly the bars start
printing. We need the bars to print in order for our indicators to,
well, indicate. It may be a shock for some but all our indicators are
lagging. Sorry. They need the price bars to move in order for them to do
their "magic".
Here are my TOP 5 reasons of why I choose Renko Bars and charts:
- They REALLY help filter the noise and may help for keeping us out of the chop
- They help smooth Indicators
- They can provide better entries
- They may help to provide smaller stops
- In my opinion they are just “cleaner"
