what does a renko chart tell you 
renko charts are designed to filter out minor price movements to make it easier for traders to focus on important trends while this makes trends much easier to spot the downside is that some price information is lost due to simple brick construction of renko charts the first step in building a renko chart is selecting a box size that represents the magnitude of price movement for example a stock may have a 0 25 box size or a currency may have a 50 pip box size a renko chart is then constructed by placing a brick in the next column once the price has surpassed the top or bottom of the previous brick by the box size amount for the stock example assume a stock is trading at 10 and has a 0 25 box size if the price moves up to 10 25 a new brick will be drawn that brick will only be drawn once the price closes at 10 25 or higher if the price only reaches 10 24 a new brick will not be drawn once a brick is drawn it is not deleted if the price rises to 10 50 or higher and closes there another brick will be drawn renko bricks are not drawn beside each other therefore if the stock drops back to 10 25 a down brick is not drawn next to the prior up box the price would have to drop to 10 in order for a down brick to appear below the prior up brick while a fixed box size is common average true range atr is also used atr is a measure of volatility and therefore it fluctuates over time renko charts based on atr will use the fluctuating atr value as the box size renko charts show a time axis but the time intervals are not fixed one brick could take months to form while several bricks may form within a day this varies from candlestick or bar charts where a new candle bar forms at specific time intervals increasing or decreasing the box size will affect the smoothness of the chart decreasing the box size will create more swings but will also highlight possible price reversals earlier a larger box size will reduce the number of swings and noise but will be slower to signal a price reversal renko charts are effective in identifying support and resistance levels since there is a lot less noise than a candlestick chart when a strong trend forms renko traders may be able to ride that trend for a long time before even one brick in the opposite direction forms trading signals are typically generated when the direction of the trend changes and the bricks alternate colors for example a trader might sell the asset when a red box appears after a series of climbing white boxes similarly if the overall trend is up lots of white green boxes a trader may enter a long position when a white brick occurs after one or two red boxes a pullback 1example of how to use renko chartsthe chart shows a strong uptrend in a stock with a 2 box size boxes are drawn based on closing prices so highs and lows as well as moves smaller than 2 are ignored there is a brief pullback marked by a red box but then the green boxes emerge again given the strong uptrend this could be used as an opportunity to enter long consider an exit when another red down box forms after the uptrend a strong downtrend forms a similar tactic could be used to enter short wait for a pullback marked by the green up box when a red down brick forms enter a short position as the price could be heading lower again in alignment with the longer term downtrend exit when up brick occurs these are sample guidelines some traders may wish to see two or more bricks in a particular direction before deciding to enter or exit the difference between renko charts and heikin ashi chartsheikin ashi charts also developed in japan can have a similar look to renko charts in that both show sustained periods of up or down boxes that highlight the trend while renko charts use a fixed box amount heikin ashi charts are taking an average of the open high low and close for the current and prior time period therefore the size of each box or candle is a different size and reflects the average price heikin ashi charts are useful for highlighting trends in the same way that renko charts are 2limitations of using renko chartsrenko charts don t show as much detail as candlestick or bar charts given their lack of reliance on time a stock that has been ranging for a long period of time may be represented with a single box which doesn t convey everything that went on during that time this may be beneficial for some traders but not for others highs and lows are also ignored only closing prices are used this leaves out a lot of price data since high and low prices can vary greatly from closing prices the use of only closing prices will reduce the amount of noise but it also means the price could break significantly before a new box es forms and alerts the trader by then it could be too late to get out with a manageable loss therefore when using renko charts traders often still use stop loss orders at fixed prices and won t rely solely on renko signals since this type of chart was designed 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 whipsaw effect this is why it s important to use renko charts in conjunction with other forms of technical analysis 