Renko charts are price charts which displays price change in form of bricks.It helps in reducing the noise from market.Noise is spikes created in market due to trading activity.A candlestick charts normally displays OHLC(Open,High,Low,Close).But a renko charts avoids OHLC with respect to time frame.Renko charts only displays price change.
Bricks in renko charts
Every brick in renko chart is plotted when price changes upto a given brick size.For example let’s assume that you have given brick size property of renko brick as 5.So for every price change of 5 units renko will draw a new brick.5 units means it can be $5 or Rs 5 change in price.
Deletion of pre-formed renko bricks
Traders get confused when a formed renko brick gets deleted or vanishes.What renko does is it deletes a brick if the next brick size price is not reached and prices reverse.For example if you are looking at renko chart of a stock at $200 and brick size is 5, renko will draw a new brick when price reaches $205.Now lets look at two different scenarios of above mentioned stock and how renko will plot the chart.
Scenario 1-When stock price reach $210 and $215
So after the stock reached $205,we are assuming that it continued its up movement.After reaching $205,the renko will start plotting a new brick upside if its moving up.Once it completes its brick size of 5 i.e. the stock reaches $210 it creates a new brick.A new brick stays valid if the price movements continue further.If price moved up again by $ 5 and reaches $215,renko will plot another new brick of size 5 and from $210-$215.Now your previous renko brick drawn when price reached $210 is a confirmed brick.
Scenario 2-When stock price reach $210 and comes back to $205
As you have seen in scenario 1,renko charts confirmed a brick only after the next brick was completed.In this scenario we will look at how a previously plotted renko brick is deleted.So lets assume that stock price was at $205 and it reached $210.At $210 renko plotted a new brick.So once price starts moving up renko will continue forming a new brick.But instead of reaching $215 if stock price starts coming down again to $210 and falls to $205,renko will delete the brick it plotted when price reached $210.
Renko charts summary:
Renko charts will plot a new brick only once the price moves double the size of brick size.So if the brick size is 5 points renko charts will only confirm a brick when a price change by 10 units happens.
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