There are many types of charts in the financial market. There is a line chart that is mostly effective in showing the overall trend and bar charts that are rarely used. The most common charts is the candlestick because it shows the opening, body, and the closing price (we talked about the best candlestick patterns here).
This is the chart we have used in all our previous guides.
There are other chart patterns that are most commonly used by professional traders. The best-known of these are the kagi, three-line break, renko, and point and figure. The first three were developed in Japan more than 200 years ago while the point and figure was developed by an American.
Part of the reason why they are not common is that they are not found as a default in the MetaTrader, maybe the most commonly used platform. Also, while they are found in TradingView, they have limitations in the free account.
In this report, we will focus on the Renko chart and explain how to use it in the market.
› Here, instead, you can know more about OHLC Chart
What is the Renko Chart?
The renko is a relatively complicated chart that focuses solely on the price of an asset and ignores the time factor.
Renko are usually simular to the American point and figure, with the only difference being that they have blocks and boxes instead of X and O columns. The renko charts usually move in a 45-degree lines, with one brick per vertical column.
How to draw it
Traders first need to set the brick value or the range unit, with the most popular ones being 10. This means that a move of 10 points and more is required to draw another brick.
For example, if the price of a stock is trading at $100 and you want to use a 10-point chart, then the price has to move to at least $110 for the white brick to be drawn. Also, if the price moves to $115, the renko will be drawn up to $115 and the next part will not show.
On the other hand, if the price moves up or down by less than the minimum fixed point, then no brick is drawn.
Advantages of using the Renko in your Trading Strategies
There are six key benefits of using the renko charts instead of a candlestick chart. These are:
Filtering the noise – The renko chart focus solely on the price of an asset. As such, it removes the time factor.
Support and resistance identification – As you will see below, the renko chart usually makes it relatively easy to identify the support and resistance levels.
Trend identification – while it is easy to identify a trend in candlestick patterns, the renko makes its easier to identify upwards and downward trend.
Determining the time to offset positions – this is an important step because candlesticks don’t provide the price target.
Provide a broader view of the market – as you will see in the example below, renko patterns usually provide a longer term view of the market.
Essential in some specific types of markets – renko charts usually work well in markets like mutual funds that provide only closing patterns.
How do Renko Charts Work?
Unlike other types of charts, it is not necessary to use technical indicators when using renko. Instead, the buy and sell signals are sent when the colour of the bricks change colour.
For example, in the chart below, We have added a renko chart and a line chart of gold. As you can see, the bullish trend remained so long as the renko chart was blue in colour. A bearish trend remained when the renko was red in colour.
Renko chart is not well-known among new traders but it is widely used by professional traders. In this report, we have looked at what the renko is, how it is drawn, and how you can use it in the financial market. You can learn how to use it by practicing in a demo account.