Understanding Renko Charts: A Brick-by-Brick View of the Market

Renko charts, introduced by the Japanese nearly two centuries ago, offer a visually simplified and price, focused way of analysing trends in stock markets. The word Renko comes from renga, which means “bricks” in Japanese, a perfect metaphor, as these charts resemble a series of bricks stacked in diagonal sequences. 

• Each brick represents a fixed price movement either upward or downward 

• Bricks are placed at 45, degree angles to the preceding brick and never appear side by side 

• Typically, upward bricks are green or white, while downward bricks are red or black 

Unlike traditional charts that use both price and time, Renko charts rely solely on price movement, making them a favourite among technical analysts and traders who use platforms like m.Stock. 

How to Create Renko Charts 

Renko charts are formed using bricks of a fixed size. This could be Re 1, Rs 5, Rs 10, Rs 50, etc. A new brick is only drawn when the price moves beyond this predefined size. 

Here’s how it works: 

• Suppose a trader sets the brick size to ₹5 and the stock is at ₹50. A new brick will only be formed if the price closes above ₹55 or below ₹45. 

• If the price moves to ₹54.95 and retreats, a new brick will not be formed. 

• Bricks don’t form adjacent to one another; for a new downward brick, the price must close below the previous upward brick’s base, not just touch it. 

This method ensures that insignificant price changes or intraday volatility do not distort the overall trend.  

How to Use Renko Charts 

Renko charts effectively filter out noise, much like Heiken, Ashi charts. However, they go a step further by ignoring time and minor fluctuations entirely. 

• Price, only focus: Renko charts use closing prices only, unlike traditional charts that also consider opens, highs, and lows 

• Time frames: On a daily chart, Renko bricks are based on daily closing prices; on a weekly chart, they rely on weekly closes 

• Brick size: Smaller brick sizes show more frequent trend changes but may be noisy. Larger brick sizes smooth out small fluctuations but react slowly to reversals 

The key to effectively using Renko charts is choosing the appropriate brick size based on a stock's volatility and the trader’s objective.  

How to Enter and Exit Trades Using Renko Charts 

While a simple approach is to buy on green bricks and sell on red, a more strategic method involves using a 13, period exponential moving average (EMA): 

• Entry signal: Enter a trade when the second green brick forms above the 13 EMA, following the first green brick 

• Exit signal: Exit when the second red brick forms below the 13 EMA, after a red brick appears 

Renko charts are also powerful for spotting support/resistance levels, breakouts, and trend reversals, enabling traders to stay with the trend longer. 

Advantages of Renko Charts 

• They eliminate noise and offer clearer trends by focusing exclusively on price 

• Effective in identifying support and resistance zones 

• Help visualise higher highs and higher lows in an uptrend and vice versa in downtrends 

• Ideal for traders using closing NAVs, especially in mutual fund strategies

Drawbacks of Renko Charts 

Despite their strengths, Renko charts have some limitations: 

• Time is ignored: Long periods of sideways movement appear as a single brick, providing no detail on intra, period fluctuations 

• Only closing prices considered: This omits high/low intraday activity, potentially causing important price data to be missed 

• Delayed signals: Price may move significantly before a new brick is drawn, leading to missed opportunities 

Because of these factors, it’s recommended to use stop, loss orders and combine Renko charts with other technical indicators for better risk management.  

Points to Remember 

• Renko charts smooth out price charts by filtering small movements and market noise 

• Brick formation depends entirely on price movement and not on time intervals 

• These charts are particularly helpful in identifying support/resistance and trend direction 

• Complementary tools should be used for confirmation before executing trades