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Renko
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Description
The Renko charting method is thought to have acquired its name from
"renga" which is the Japanese word for bricks. Renko charts were
introduced by Steve Nison (a well-known authority on the Candlestick
charting method).
Renko charts are similar to Three Line Break
charts except that in a Renko chart, a line (or brick as they are
sometimes called) is drawn in the direction of the prior move only
if a fixed amount (i.e. the box size) has been exceeded. The bricks
are always equal in size. For example, in a five unit Renko chart, a
20 point rally is displayed as four equally sized, five unit high
Renko bricks.
To draw Renko bricks, today's close is compared with the high and
low of the previous brick (green or red). When the closing price
rises above the top of the previous brick by the box size or more,
one or more equal height, white bricks are drawn in the next column.
If the closing price falls below the bottom of the previous brick by
the box size or more, one or more equal height, red bricks are drawn
in the next column.
If the market moves up more than the amount required to draw one
brick, but less than the amount required to draw two bricks, only
one brick is drawn. For example, in a two unit Renko chart, if the
base price is 100 and the market moves to 103, then one green brick
is drawn from the base price of 100 to 102. The rest of the move --
from 102 to 103 -- is not shown on the Renko chart. The same rule
applies anytime the price does not fall on a box size divisor.
Indicators calculated on renko charts use all the data in each
column and then display the average value of the indicator for that
column.
Interpretation
Basic trend reversals are signaled with the emergence of a
green or red brick. A new green brick indicates the beginning of a
new uptrend. A new red brick indicates the beginning of a new
downtrend. Since the Renko chart is a trend following technique,
there will be times when the market induces whipsaws. However, a
trend following technique is intended to allow traders to ride on
the major portion of the trend.
Since a Renko chart isolates the underlying trends by filtering out
the minor ups and downs, Renko charts are excellent for helping
determine support and resistance levels.
For more in-depth coverage of the Renko charting method, we
recommend the book Beyond Candlesticks by Steve Nison.
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