How to Read a Renko Chart
To read a Renko chart, understand that a new brick appears only when price moves a set distance, so the horizontal axis is movement rather than time. A run of same-colored bricks is a trend, and the brick size is the only parameter.
A Renko chart prints a brick whenever price moves a fixed distance, and nothing at all when it does not. Time is removed from the horizontal axis entirely. That single design choice produces every advantage and every limitation the chart type has.
Before you start
A brick size chosen deliberately, because it is the only parameter and it decides everything. Too small and the chart is noise; too large and it shows almost nothing.
An understanding that time is not on the horizontal axis. Ten bricks might span an hour or a quarter, and the chart gives no indication which.
A real price chart alongside, since a brick’s price is a threshold rather than a trade. Bricks land on fixed increments, not on prices anything necessarily transacted at.
The steps
1. Set the brick size from the instrument’s range
Take the median high-to-low range of the last fifty bars and the fourteen-period average true range, both measured on the instrument you will chart. A brick around that size filters noise without erasing structure.
2. Read a run of bricks as a trend
Several consecutive bricks in one direction means price has traveled that many increments without reversing enough to print the other color.
3. Remember what a reversal costs
Printing an opposite brick usually requires price to move two brick-sizes against the trend. That threshold is what filters noise and it is also the lag.
4. Do not read duration into the chart
A long consolidation prints nothing. The chart jumps from before it to after it with no indication that weeks passed, which matters for anything with a time dimension.
5. Take levels from the real price chart
Brick boundaries sit at multiples of your chosen size. They are arithmetic, not places anybody defended, and stops belong at structural levels instead.
6. Use it as a filter
The brick color decides which direction you are permitted to trade. The setup and the level come from somewhere with time and real prices on it.
7. Keep the brick size fixed
Adjusting it redraws every brick back to the beginning, so a chart that looked choppy becomes a clean trend and vice versa. That is fitting, not tuning.
How to tell it worked
Brick size was set from a measured range, not from a round number.
The brick size has been changed 0 times since the chart was configured.
0 orders were placed at a brick boundary, all levels coming from the price chart.
And the chart is used as a filter, declining at least 1 trade in the last 30 days.
What removing time costs you
Anything with a schedule. Sessions, news releases, expiries, the close. All of them are invisible on a chart with no time axis.
And the ability to judge pace. A trend that took two days and one that took two months look identical, which matters a great deal for holding periods and financing costs.
Choosing the brick size honestly
Derive it from the instrument, not from the chart’s appearance. A fraction of the average true range is a defensible starting point because it relates the parameter to how the instrument actually moves.
Test it on data you did not choose it from. Any brick size can be made to produce a clean-looking chart over a selected stretch, which is the same fitting problem every parameter has.
And accept that it changes with volatility. A brick size set in a quiet period prints constantly in an active one. Re-deriving it periodically is legitimate; re-deriving it because the chart looks messy today is not.
What backtesting on it actually measures
Brick prices are thresholds, so a fill at one is a fill at a price that may never have been offered. A test entering at brick boundaries is measuring the increment scheme rather than a strategy.
The bricks also repaint in a specific sense. The current brick is provisional until price has moved far enough to confirm it, so a live chart and a historical one can disagree about the most recent bar.
Which means a backtest here needs the underlying price data, not the bricks. Use the chart to define the condition — “while bricks are green” — and take entries and exits from real prices at real times.
Anything else produces an equity curve of remarkable smoothness. That smoothness is the brick construction showing through, and it is the single most common way this chart type produces results nobody can reproduce live.
The original data
Of the 24,971 unique videos in the search study behind this site, 71 mention this chart type in the title, at a median of 5,325 views across 40 channels, and 66% of those titles are instruction-shaped. Heikin Ashi appears in 74 at 20,370.
71 videos at 5,325 against 74 at 20,370 for the other smoothing chart. About the same coverage and a quarter of the audience per video, which is what happens when a chart type requires a parameter decision before it can be demonstrated at all.
The answer to the question on that chart is that a larger brick will always look cleaner. That is arithmetic rather than an improvement — every increase in brick size produces a tidier chart, right up to the point where the whole history is three bricks and shows nothing at all.
When it fails
The failure is tuning the brick size until the chart looks right, and it is unusually seductive here. Unlike most parameters, this one visibly transforms the entire history the moment it changes. A choppy chart becomes a clean trend with one adjustment, which feels like finding the correct setting. What actually happened is that a size was selected because it flattered the data it was selected on, and the next stretch of market will look choppy again at that setting.
The second failure is reading duration into it. There is no time axis.
A third is placing orders at brick boundaries. They are increments.
A fourth is using it alone. It supplies no structural levels.
A fifth is a round-number brick size. It should come from the instrument.
And a sixth is trading anything schedule-dependent from it. Sessions are invisible.
Related
Renko charts covers the construction and the reversal rule. Tick charts is the other common way of removing time from the axis. And trend following is the approach this chart type supports.
A quiet week and an active hour can occupy the same width here. Do not read the horizontal axis as duration, because it means accumulated movement, which is a different quantity entirely. Almost everything that looks odd about these charts comes from that one substitution.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.