Renko Candles: Designed to show clear market trends while filtering out noise

Originating in the 1700s courtesy of Japanese rice traders, Renko candles are a technical analysis tool designed to show clear price trends while filtering out market noise.

Offered as an alternative to more commonly used OHLC candles, Renko charts are unique in how price action is displayed, with each candlestick the same size and having no specific timeframe.

When used effectively, traders can use Renko charts to not only better understand trends in price, but also filter out noise that may distract from overall market direction.

Renko is believed to have come from the Japanese word “renga,” meaning brick, with each candle having a uniform size and brick-like appearance.

Renko charts are a unique way of showing price action and have some clear differences from more commonly used OHLC candles. This can be broken down into three main areas:

Brick size: For a new Renko candle to form, price must move a pre-determined amount, or brick size. Depending on the assignment method, brick size can be a set amount of pips, a minimum percentage change, or even based on the value of indicators like the ATR. The larger the brick size, the less sensitive the chart will be to price fluctuations, and vice versa.

Plotting the bricks: When plotting the chart, Renko will draw a new candle when one of the two following conditions is met:

• For another brick of the same color to be drawn, price will need to move the pre-selected brick size in the same direction. For example, if the previous candle was bearish and brick size is set to 30 pips, price will need to fall by a further 30 pips for another bearish candle to be drawn and vice versa.
• For a brick of a different color to be drawn, price must move twice the pre-selected brick size in the opposite direction. For example, if the previous candle was bullish and brick size is set to 30 pips, price will need to fall 60 pips in the opposite direction for a bearish candle and vice versa.

New bricks are always plotted at a 45-degree angle to the previous candle regardless of direction.

No timeframe: Unlike OHLC charts, Renko charts have no timeframe, with candles being opened and closed on price movement data alone. As such, several bricks can form in periods of high volatility, while it might take longer for a single brick to form in a quiet market.

As part of a balanced and comprehensive trading system, Renko has many potential uses. Here are a few examples:

1. Entry indicator: If the chart shows bricks changing color, this could suggest that the existing trend will continue or predict a reversal.
2. Exit indicator: While managing an open trade, a change in brick color could suggest that the current move is exhausted and that your position should be closed to secure profits and free up margin.
3. Confirmation indicator: When looking to open a position, Renko can confirm whether the market is currently trending or has recently trended in the desired direction.

By design, Renko charts are intended to be easily read and applied to your trading strategy. Here are a few things to keep an eye on:

Consecutive bricks of the same color: If the chart shows bricks that are consecutively bearish or bullish, there is sustained movement in one direction, suggesting a strong trend.

Change in brick color: If the chart shows bricks changing color, either from bearish to bullish or bullish to bearish, this suggests the start of a period of consolidation or, in some cases, the potential for a trend reversal.

Oscillating bricks: If the charts consistently show price oscillating from bullish to bearish, this can be interpreted as a prolonged period of consolidation and general market indecision. This can highlight key support and resistance levels currently controlling price in some circumstances.

• Filtering out market noise: By design, Renko candles filter out noise that could otherwise distract from the underlying trend. When following conventional wisdom to ‘trade with the trend,’ Renko candles better identify which direction the market is moving, which can assist with finding trading opportunities, among other uses.
• Improved identification of key levels: With better identification of the underlying trend being Renko’s first concern, key areas of support and resistance are made clearer and are easier to identify.
• Smoother charts: In today’s increasingly cluttered charting environment, Renko offers a much cleaner and more straightforward method of viewing price action. This may allow for easier decision-making regarding trade entries, exits, and general position management in some situations.

• Lagging indicator: Because a new brick only forms after a significant price movement has already happened, Renko can be considered a ‘lagging’ indicator. Depending on brick size, this may result in the majority of the move already happening before a signal to enter, especially on lower timeframes.
• No timeframe: With each Renko candle being opened and closed on price data alone, no one can be sure when a new brick will appear. With most strategies relying on the candle to close for a valid trading signal, traders who use Renko may miss entries due to the unpredictability of when a new candle will form.
• Inconsistent with other indicators: Many popular technical indicators, such as stochastics, RSI, and MACD, use the current timeframe as part of their calculation method, which can prove problematic when combined with Renko. Lacking a uniform timescale, some indicators yield widely different results when combined with Renko candles, which may give less meaningful readings when compared to OHLC candles.

Learn more about technical indicators: Tips for Using the Chaikin’s Money Flow (CMF) Indicator in Your Trading

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