## What is Renko Charting

Renko charting is a tool that represents price movements by using bricks. Renko is the Japanese word for brick. If a price has moved higher by a prescribed amount, we add a new brick. We can select the color; it is usually green, white, or gray. If the price has moved lower by a prescribed amount, a new block, whose color is usually either black or red, appears in the opposite direction.

The computational logic for constructing a Renko chart, shown here and illustrated as a flowchart in Figures 8.1 and 8.2, is used to create Renko charts in most programs. It follows the rules set forth in the book Beyond Candlesticks, which we discussed in Chapter 2.

The essence of Renko charting is that each brick reveals, at various time intervals, key information on market sentiment. Renko bricks become

Figure 8.1 Renko Construction Logic

Source: Abe Cofnas and Sridhar Iyer

### Figure 8.1 Renko Construction Logic

Source: Abe Cofnas and Sridhar Iyer weapons of reconnaissance and detection that allow the trader to identify threats to the profits he has gained. Why is this important as a tool for improving trading exits and capturing more profits? The answer is that by setting Renko bricks to a small or microlevel price increment, if a pattern results, even at a very small increment, this pattern will enable the earliest possible detection of a change in sentiment. The trader needs to detect such changes so that he can capture and protect the profits he has achieved. In currency trading, for example, a few seconds can be enough to wipe out all of the pips gained, and the price can easily reverse into negative territory. Using Renko charts, the trader gains

Figure 8.2 Renko Construction Supplemental Logic

Source: Abe Cofnas and Sridhar Iyer

### Figure 8.2 Renko Construction Supplemental Logic

Source: Abe Cofnas and Sridhar Iyer the ability to quantify the persistence of sentiment. If bullish sentiment is prevailing, the trader will be able to detect a bullish pattern even at the micro level. Depending on the trading instrument, we will see that the micro level of trading can be one minute or less. When using Renko charts, bullish sentiment is easily recognizable as a sequence of bullish (green, grey, or white) bricks. If bearish sentiment is prevailing, a descending series of bearish bricks, easily recognized by a black or red color, will appear. Detecting a change in the persistence of sentiment is the key to getting out before profits disappear.

We can see in Figure 8.3 the dominance of bullish sentiment. The bricks move upwards nearly uninterruptedly in an obvious bullish pattern. Now, let's take a closer look. We can see that the bullish run-up has intermittent interruptions with bricks reversing down. The first reversal was a one-brick reversal, followed by a four-brick reversal, a two-brick reversal, and a one-brick reversal. Finally, we see a five-brick reversal.