Renko charts origins can be traced back to Japan and they were first introduced to the West by Steve Nison in his book “Beyond Candlesticks”. The actual word Renko is derived from the Japanese word “Renga”, which means bricks. This indicator is used quite a lot in Managed Forex Accounts, Forex Trading Signals, and it is among subjects discussed in the Training Course
This indicator is concerned with price movement only; time and volume are not included, this means that the bricks direction will remain constant even as new data is incorporated into the chart as long as the price doesn’t close higher than the brick’s setting. For example, if you have a brick setting of 5 dollars and the price closes 23 dollars higher, then four bricks will be added to the chart
A Renko chart is constructed by placing a brick in the next column of a chart once the price surpasses the top or bottom of the previous brick by a predefined amount called the “brick setting”. So practically, there must be a particular size of movement in the price or the brick will not appear.
This technique should be used by swing traders rather than intra-day traders. Below is a charting example with Renko bricks.
Renko bricks are drawn at 45 degree angles from each other and are based on the closing price of the time period. Blue bricks are formed when the direction of the trend is upwards, while red bricks are formed when the trend is downwards. In order to generate the opposite color, the brick setting must be exceeded but in the opposite direction. This of course classifies Renko charts as a lagging indicator and in choppy markets it can lead to a number of false signals.
This type of chart is very effective for traders to identify key support and resistance levels. Trading signals are generated when the direction of the trend changes and the Renko bricks alternate colors. For example, a trader will buy the currency pair when a blue brick is placed at the end of series of descending red bricks, and vice versa, the trader will sell the currency pair when a red brick is placed at the end of series of climbing blue bricks. In that sense, the Renko charts can be used as a way to follow the general price trend of a currency pair, or in other words, to determine possible changes in the price trend.