What you are seeing on your screen are two live trading charts of a stock. On the right side, it’s the normal candlestick chart, but on the left side, it’s the Renko Chart, and as you can already tell, Renko Charts look very clean, and much easier to read than the candlestick chart. Now, the right side candlestick chart might be difficult to read because it is zoomed out too far, but there is a reason for that. You see, the reason Renko charts look very easy to read, is because they lack some of the price data. The renko bars are not exactly dependent on the  time. By that I mean, Renko Bars don’t have an expiry. A renko bar is built using the price movement, rather than both price and the timeframe. A new renko bar is only formed, when price moves a specific amount, and if price doesn’t move, a new renko bar won’t be formed, and the current renko bar won’t be closed.

 

Because of this, renko charts are very popular among beginner traders, as they can be used to identify the trend, and filter the range and noisy markets. In most cases, renko bar size is automatically calculated and set by the charting platform using the ATR values. But with the right renko settings, if the price gets noisy, no new renko bar will appear. But if you are a beginner trader, and have never seen renko charts before, Renko charts can be very misleading. For example, If you look at past data like this, and think that you could have made a lot of money with the Renko charts, by entering here and exiting when the bars changed their color, you would have made less money than what you think.

You see, renko bars are not always formed brick by brick, in other words, one after another. In many cases, multiple renko bars can appear at the same time. That’s because, a green renko bar only appears, if the price makes a move up, and the normal candle of that timeframe, actually closes after making a move above a specific price.

 

For example, if the renko bar size was 5 dollars, a new green bar will only appear if the price moves more than 5 dollars in the upward direction. But here’s a twist, even though renko bars have no expiration and stay at one place for a long time if the price doesn’t move anywhere, renko bars are still dependent on the timeframe you have selected. Like I said before, in simple words, renko bars depend on the closing price of the normal candles. Let’s say you have selected the 2 min time frame, so every normal candle is closing after every 2 mins. Because of this, if the renko bar size is 5 dollars, a new green bar can disappear, if the price makes a move up, but closes with less than 5 dollars move. The point is, even if the price movement looks really clean on the renko charts on the past data, you won’t always catch the entire move in the liive markets. Here’s a real example, where renko bars formed multiple same color candles in a row.

 

Now, one might think that they could have made a lot of money by entering when the bar changed its color, and exiting when it changed the color again. But if you compare it side by side with the normal candlestick, you can see that, instead of entering at the closing price of the first renko bar, you would have entered right here, which is a completely different price point than what we thought before. Similar thing with the exit signal. The exit is not at the closing price of this Renko bar, but at a different price point. Still, you can make a big profit if the price makes a big move in your favor. If that’s so, why won’t you see professional traders use the renko charts while trading? Well, the answer is pretty simple, with a good trading strategy on the candlestick chart, you can enter at a much better price than where you would enter with Renko bars. And if you want to catch a big profit, simply use a moving average and trail your stop loss with it. It will give similar results like the Renko bars, maybe even better. Furthermore, Renko charts don’t show high and low points of a price movement. And they don’t tell you if the price is in a range for a long time or not. This information for an experienced trader can be very useful to trade breakouts. Also, normal candles give a lot of information about the number of buyers and sellers trading in the market with their different candle sizes.

 

If the Renko chart for taking entries is not as good as the candlestick chart, what good is it then? Renko chart is not exactly bad, it’s just that everything that Renko charts offers can be achieved on the normal candlestick chart. But if you are a beginner trader, you can use the Renko charts to read the market structure. And since Renko charts are easier to read, you can use them to find strong price areas where price has potential to react from.

 

As you can see, potential support and resistance areas are easier to spot on the Renko chart. And remember, support and resistance is an area, and not a single line on a chart. Price won’t react exactly from the support and resistance you draw, it can do that from little bit above or below.

 

So here are the important points you should note.

Number 1. Renko charts filter noise that beginner traders can take advantage of to read the price structure easily.

Number 2. Renko bars can take forever to form if the price doesn’t move up or down. But remember, Renko bars are dependent on the timeframe you have chosen. Since Renko bars are based on the closing price of the timeframe, multiple candles can form or disappear. And sometimes, one can lose a lot of money if the price suddenly makes a big move in the opposite direction before the new Renko bars are completely formed.

Number 3. Renko charts have a lot of limitations. Many don’t use Renko charts because candlestick charts provide more information. If you want to catch the big move, just trail your stop loss using a moving average. And use the Renko charts to find the support and resistance areas. 

 

That’s all.