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Overview
The Renko charting method is thought to have acquired its name from "renga" which is the
Japanese word for bricks. Renko charts are similar to
Three Line Break charts except that in a Renko chart, a line
(or "brick" as they're called) is drawn in the direction of the prior move only if prices
move by a minimum amount (i.e., the box size). The bricks are always equal in size. For
example, in a 5-unit Renko chart, a 20-point rally is displayed as four, 5-unit tall Renko
bricks.
Kagi charts were first brought to the United States by Steven Nison when he
published the book,
Beyond Candlesticks.
Interpretation
Basic trend reversals are signaled with the emergence of a new white or black brick. A new
white brick indicates the beginning of a new up-trend. A new black brick indicates the
beginning of a new down-trend. Since the Renko chart is a trend following technique, there
are times when Renko charts produce whipsaws, giving signals near the end of short-lived
trends. However, the expectation with a trend following technique is that it allows you to
ride the major portion of significant trends.
Since a Renko chart isolates the underlying price trend by filtering out the minor price
changes, Renko charts can also be very helpful when determining support and resistance
levels.
Example
The following charts show Intel as a classic
high-low-close bar chart and as a 2.5-unit Renko chart.
I drew "buy" and "sell" arrows on
both charts when trend reversals occurred in the Renko chart. You can see that although
the signals were late, they did ensure that you invested with the major trend.
Calculation
Renko charts are always based on closing prices. You specify a "box size" which determines
the minimum price change to display.
To draw Renko bricks, today's close is compared with the high and low of the previous
brick (white or black):
If the closing price rises above the top of the previous brick by at least the box
size, one or more white bricks are drawn in new columns. The height of the bricks is
always equal to the box size.
If the closing price falls below the bottom of the previous brick by at least the
box size, one or more black bricks are drawn in new columns. Again, the height of the
bricks is always equal to the box size.
If prices move more than the box size, but not enough to create two bricks, only one
brick is drawn. For example, in a two-unit Renko chart, if the prices move from 100 to
103, only one white brick is drawn from 100 to 102. The rest of the move, from 102 to 103,
is not shown on the Renko chart.
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