Trading Systems Series

HOW DO I TRADE STOCKS.COM

Copyright 2012
 T HE R ENKO C HART
Renko charts have their origins in the early days of the markets being traded in Japan, some 140
years ago and were first introduced to the West by Steve Nison in his book Beyond Candlesticks in
1994. The actual word Renko is derived from the Japanese word renga, which means bricks. When
you see a Renko chart it will become obvious why it is derived from bricks.

Renko charts are price charts with rising and falling diagonal lines of boxes that are either filled or
hollow. With their equal brick size and with their relentless trend detection ability, the Renko charts
convey equilibrium where there is little. The Renkos stairway design takes a lot of the noise out of
the market.
Trading Systems Series | Copyright 2012

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What makes Renko different from Bar
Bar or Candlestick charts?
Renko is only concerned with price movement, unlike Candlesticks or Bars charts time is not
included. Being that it is time independent, it only shows a date at the bottom of the chart when the
price moves up or down at a predefined level i.e. when the chart is set to show a Renko box every
time a stock moves more than 1% higher or lower than yesterdays closing price.

In the example below, there were no additional Renko bars between the 10th to the 23rd of October
for this particular stock. But on the 24th the stock closed higher and therefore recorded a new Renko
boxes and the date is now recorded on the chart.

Renko charts do not show wicks like candles (high and low of the day), they only concern themselves
with price movements in pre-determined increments. I use the charts from close to close i.e. has the
price moved up more than 1% from yesterdays close to todays close? If it has a new Renko bar will
form.

Note that for a green box to change to a red box and vice versa, the stock price in my example will
have to move by 2%. The first 1% will move it beyond the last red box and the next 1% to make a
green box. Therefore, whatever parameter you are working with in terms of setting up your charts, in

Trading Systems Series | Copyright 2012

order form them to change direction it will have to be a double move. In my example, once it is
moving in the same direction (same colour), the Renko boxes will only have to go up 1% to record a
new Renko box.

Gaps
Renko does not display gaps, it simply records the sudden price movement of the underlying by
instantly showing the number of Renko bars that are equal to the predefined percentage or point
move. I use 1% to show the changes, so if a stock goes up 6% higher at the open due to news
coming out about the company 6 green Renko bars will appear.

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 Renko Charts Construction
It is constructed by placing a brick in the next column once the price surpasses the top or bottom of
the previous brick by a predefined amount. In our chart below, the bricks that appear in each
column all happen within one day. So when you see that some columns are wider than others, this
means that the stock moved more than one percentage points up or down verses the last columns
days close.

The green bricks are used when the direction of the trend is up, while red bricks are used when the
trend is down. This type of chart is very effective for traders to identify key support/resistance levels.
Trading Systems Series | Copyright 2012

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Disadvantages of Renko
Typically a trader using Renko will sell an underlying asset when a red brick is placed at the end of
series of climbing green bricks or vice versa after a run of red bricks. Since this type of chart was
designed as a way to follow the general price trend of an asset, there can often be false signals
where the color of the bricks changes too early, producing a whip-saw effect. As per the area on the
chart below:

Additional Parameters
There are 4 ways to specify the Brick Size for a Renko chart: Absolute Points, Average True Range
(ATR), closing prices or high/low prices. Note that not all chart software packages will allow these
four variables.

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Absolute Points (Futures/Forex Market)

With the "Absolute Points" method, you specify the size of each brick on the chart in points. The
advantage of this method is that it is very easy to understand and predict when new bricks will
appear. The disadvantage is that the point value needs to be different for high priced stocks than for
low priced stocks. Typically you will need to choose a value that is roughly 1/20th the average price
of the stock during the time frame you want to chart. Common values include 1, 2, 4, and 10.

Important Note: The Default for the "Pts" method is currently 14 which is too large for most stocks.
You would need to change it to a smaller number to get a useful chart.

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 Average True Range

The "Average True Range (ATR)" method uses the value of the ATR indicator to determine the brick
size. The ATR indicator is designed to ignore the normal volatility of a stock and thus it can
"automatically" find good brick sizes regardless of the value or volatility of the stock selected. ATR
with a value of 14 is the default value for Renko charts and should generate a very usable chart in
most cases.

Close Only

This is the method I use. I set up my charts to show daily movements from close to close in
increments of 1%. Simply, if the price closes more than 1% higher today than it did yesterday a new
green Renko box will form.

High/Low Prices

Similar to using the closing prices, the High and Lows of the day will determine whether a new Renko
box will appear up or down.

Conclusion
Very few traders use Renko charts. I believe that this is due to the lack of material in literature,
particularly in English. Furthermore, the bits and pieces of information on Renko in circulation
nowadays make eyebrows rise. The Renkos sheer simplicity invites suspicion. Perhaps this is
because we conditioned ourselves for too long into believing that if a theory is not complicated
enough, we dont stand a chance of winning!

Courtney Smith introduced me to Renko charts and they improved my trading system, therefore they
have become a cornerstone in my trading strategy.

Millions of dollars have been and will continue to be spent by the financial institutions on the
research and development of new and sophisticated trading systems. However, perhaps those
financial institutions operate trading systems that are more profitable than the my use of Renko, but
as far as the small investor is concerned, in the battlefield where the cents fight the dollars we need
all the help we can get and the old Renko wisdom is a sharpened weapon in my battle chest.
Trading Systems Series | Copyright 2012