Brick by Brick (Renko) Theory

Brick by Brick (Renko) Theory

A common complaint from traders is that they seem to exit from profitable trades too soon. They find that fear grips them and they find they could have made much more money if they had only stayed in the trade longer. In our search for profits, we are often shaken out by the market’s noise.

What if there was a way to chart that minimized the effect of that market noise and could filter out small corrections, while still giving you the ability to see reversals that could put your profits in jeopardy? Well, you are in luck because there is such a tool. It is known as a renko chart.

Renko (derived from the Japanese word “renga,” or brick), is based on movements in price and not time. There must be a particular size of movement or the chart ignores it. Since time is not a factor for renko charts, it may be a technique that should be used for swing or position traders rather than for intraday traders.

The only parameter that must be determined for the renko chart is the size of the brick itself. The larger the size, the less movement a chart will show, but there will be larger stops on the positions. If you use too small of a brick size, you will have too much sensitivity to price movement, and the reason for using the renko chart is lost. While there is no perfect setting, traders will often use 1% of the price of the stock as the setting on daily renko charts. You need to experiment yourself and see which number offers you the best view of the trend.

Renko bricks are drawn at 45 degree angles from each other and are based on the closing price per period. If you have a brick setting of 5 rupees and the share price closes 23 rupees higher, four bricks would be added to the chart. Another brick would only be added if you were to have a new close another two points higher. For there to be a brick created in the opposite direction, you would need prices to reverse and close at least two times the size of the brick. If price does not do this, then any correction will be ignored by the chart.