In this article, we will discuss what is Renko Chart. This is an excerpt from the book Sentiment Indicators by Abe Cofnas. Renko charting is a tool that represents price movements by using bricks. Renko is the Japanese word for brick. If a price moves higher by a certain amount, a new brick is added. We can select the color; it is usually green or white. Similarly, if the price moves lower by a certain amount, a new block, whose color is usually black or red, appears in the exact opposite direction.
The computational logic for constructing a Renko chart is used to create Renko charts in most programs like Zerodha Kite. It follows the rules set forth in the book Beyond Candlesticks. The essence of Renko charting is that each brick reveals, at various time intervals, key information on market sentiment. Renko bricks become weapons of reconnaissance and detection that allow the trader to identify threats to the profits he has gained. Why is this important as a tool for improving trading exits and capturing more profits? The answer is that by setting Renko bricks to a small or micro level price increment, if a pattern results, even at a very small increment, this pattern will enable the earliest possible detection of a change in sentiment. The trader needs to detect such changes so that he can capture and protect the profits he has achieved. In currency trading, for example, a few seconds can be enough to wipe out all of the pips gained, and the price can easily reverse into negative territory. Using Renko charts, the trader gains the ability to quantify the persistence of sentiment.
If bullish sentiment is prevailing, the trader will be able to detect a bullish pattern even at the micro level. Depending on the trading instrument, we will see that the micro level of trading can be one minute or less. When using Renko charts, bullish sentiment is easily recognizable as a sequence of bullish (green or white) bricks. If bearish sentiment is prevailing, a descending series of bearish bricks, easily recognized by a black or red color, will appear. Detecting a change in the persistence of sentiment is the key to getting out before profits disappear. We have understood what is Renko Chart. We will check it for an image example as shown below:
We can see in the image above, we have seen what is Renko Chart and the dominance of bullish sentiment. The bricks move upwards nearly uninterruptedly in an obvious bullish pattern. Now, let’s take a closer look. We can see that the bullish run-up has intermittent interruptions with bricks reversing down. The first reversal was a one-brick reversal, followed by a four-brick reversal, a two-brick reversal, and a one-brick reversal. Finally, we see a five brick reversal.