The Renko charting method has acquired its name from “renga” which is the Japanese word for bricks. In Renko charts a line (or “brick”) 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.
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 downtrend. Draw a new line only when a predetermined amount is exceeded from the top/ bottom. All the bricks are of the same size. Therefore, more than one line could be drawn in a single period.
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, current period’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.
Indicators calculated on Renko charts use all the data in each column and then display the average value of the indicator for that column. Renko (Bricks) are drawn equal in size for a determined amount. If prices change by the determined amount or more, a new brick is drawn.
If prices change by less than the determined amount, the new price is ignored. Renko Charts display price movements if they are bigger than a fixed amount.
The Renko chart is a trend following technique. But sometimes Renko charts gives 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. A price level at which you would expect selling to take place due to technical analysis. The resistance level of one is the support level for the other