Most of the traders use Japanese candlestick charts. But not many investors know about Renko charts. In this tutorial, we will tell you why and how you can apply Renko charts in trading.
Renko came from the Japanese word “renga,” which means “brick.” If you look at the Renko chart, you will see that it consists of bricks.
A renko chart differs significantly from the Japanese candlestick chart. Why do we compare these types of charts? Because the Japanese candlestick chart is the most famous among traders.
The first difference is time. Unlike the Japanese candlestick chart, the Renko chart doesn’t consider the time. One brick appears when the price passes a certain distance. For that, you choose a brick size. For instance, if you define ten pips as a brick size, the brick will appear on the chart if only the price goes ten pips up or down. You can determine the direction of the price with a brick color. Bullish and bearish bricks are painted differently.
The second difference is the size. Japanese candlesticks have different sizes. It helps traders define market volatility. However, Renko bricks are equal. Moreover, they don’t have shadows as candlesticks do.
The third difference is the placement of bricks. Renko bricks are never next to each other. They are formed at a 45-degree angle. The bricks aren’t changed once they appear on the chart.
The Renko chart isn’t a default setting in MetaTrader. You need to download it from the Internet. Moreover, it can be presented in the form of an expert advisor or an indicator. We would recommend that you use an indicator.
If you need to add an indicator in MetaTrader, follow these steps:
- Download the indicator from any reliable platform.
- Open MetaTrader and click “File” in the menu. Choose “Open Data Folder” – tap “MQL4″ folder – click “Indicators” – paste the indicator into this folder.
- Restart MetaTrader. Insert the Renko chart by clicking “Insert” – “Indicators” – “Custom” – name of the indicator.
As we have told above, the formation of Renko bricks is based on the price distance you define. Thus, you need to determine the size of the brick considering the market’s volatility and trade period.
As with any trading tool, the Renko chart has advantages and limitations. You should know both to use the tool effectively.
- The Renko chart reduces market noise.
- On the Renko chart indicators can be more effective.
- It’s an easy-to-use tool.
- Difficult to define the size of the brick. If it’s too small, there are risks of significant market noise.
- Sometimes it takes a lot of time for a brick to appear, especially during price consolidation.
- An entry point can be hardly defined if many bricks form in one direction.
We would recommend using the Renko chart to scalpers. The intraday signals may be more reliable than the signal on daily charts. The major signal the chart produces is a color change which indicates the odds of the market reversal. The Renko chart allows for trading big trends. There are other functions of the Renko chart.
Although there are various ways of defining support and resistance levels, local tops/bottoms is the key one. Due to the smoothed volatility, support/resistance levels can be defined easier on the Renko chart.
The Renko chart can also be used with Fibonacci levels, which also reflect support and resistance. The idea is similar: when Renko bricks touch Fibo levels, there are odds of the price reversal.
The next signal is overbought/oversold zones. Although the Renko chart doesn’t depict these areas directly, you can still apply some strategies to define the trend correction.
Let’s imagine there is a strong downtrend. If the price forms a wave that is equal to the wave at the beginning of the downward movement, there are odds the price will reverse up. Also, a trader can apply an oscillator which will confirm a reversal. For instance, the RSI oscillator.
The signal is based on support/resistance levels. If Renko bricks break above the resistance or below the support, it’s a sign of the trend continuation. The common strategy is to open the trade in the direction of the breakout.
Even if you are a beginner trader, you have heard about Head-and-Shoulders, Double Top/Bottom patterns. Sometimes these patterns are more clear on the Renko chart. They are used the same way as on the candlestick chart.
The Renko chart is not a standard setting in the MetaTrader platform. However, it’s effective and could help you while trading. Some signals are even clearer on the Renko chart.