Renko Charts: Filtering the Noise for Pure Price Action

Candlestick charts are addicted to Time. We switched our H4 strategy to Renko bricks for Q3 2024. The “noise” disappeared, and our hold time tripled.

Historical Context

While used in Japan for centuries (originally for Rice Futures), Renko was introduced to the West by Steve Nison in his 1994 classic Beyond Candlesticks. Nison revealed that “Renko” comes from “Renga” (Brick), and its sole purpose was to filter out small price movements that distract the trader from the primary trend. Every 5 minutes, a new bar prints. Even if the price hasn’t moved. Even if volume is zero. The chart keeps scrolling.

This creates “Noise.” Dojis, long wicks, choppy bars. It looks scary. It induces panic.

Renko Charts don’t care what time it is. They only care if the price moved.

The Delta: Price > Time

Renko comes from the Japanese word renga (brick). A new brick is only drawn if price moves a specific amount (e.g., 10 pips).

• Price moves up 9 pips? Nothing happens.
• Price moves up 10 pips? New Green Brick.
• Price moves down 50 pips? 5 Red Bricks.

This completely removes the “noise” of small fluctuations. If the trend is up, you see a staircase of Green. If the trend is down, you see a waterfall of Red.

The Hidden Advantage: Psychology

The biggest killer of traders is “micro-management.” You see a candle wick down against you, and you panic-close. On a Renko chart, that wick doesn’t exist. You only see the completed block. This helps you hold winners longer.

The Strategy: The ATR Brick

Don’t use a “Fixed” brick size (e.g., 10 pips). Volatility changes. 10 pips is huge for EUR/USD but tiny for Gold.

Use ATR (Average True Range). Set the brick size to the ATR(14) value. This dynamically adjusts the chart to the current market speed.

The Entry Rule:

1. Add a 20-period Moving Average.
2. If Price is Above the MA:
   • Wait for a Red Brick pullback.
   • Enter Long on the first Green Brick.
3. If Price is Below the MA:
   • Wait for a Green Brick pullback.
   • Enter Short on the first Red Brick.

The Exit Rule: Exit when a brick forms in the opposite color.

The Risk

Renko is not perfect.

1. The Reversal Lag: For a brick to change color, price has to move down by 2x the brick size (to clear the current high and form a low). You are always a bit late to the reversal.
2. No Wicks: You don’t see exactly how high price went before closing. (Note: Some modern Renko charts do add wicks).

Conclusion

If you suffer from “Chart Anxiety” and over-trading, switch to Renko for a week. The clarity will shock you. It forces you to ignore the ripples and focus on the tide.

Are you trading the clock, or the price?