Renko is composed of small units which we call as Bricks. Unlike candlesticks, all the bricks of a Renko chart have same size. If the price of a security or stock increase by a certain amount, formation of green brick takes place and if the price decrease by a certain level, Red Brick forms.
How does Renko Bricks form?Renko Bricks form when the market increase or decrease by a certain amount called Brick size. We can decide this brick size on our own. By default, the Brick size is decided by the trading software based on the volatility of the market.We will talk about this a little later.
Suppose that we have set the Brick size to 5, this means that the formation of 1 Brick represent increase or decrease of Rs.5 in the price value of that commodity or stock. If the price increase by Rs.5, a green brick will form on its upper side in the next column and if the price decrease by Rs.5 ,Red Brick will form downside it in the next column.
One more interesting thing that you should note about Renko Bricks is that next Brick forms only when the change in price is equal to or more than the Brick size. If the price increase,we measure this change from upper Boundary of the Brick and if price decrease, we measure the change from lower boundary of Brick. This will become clear with the following explanation with an example.
Suppose that a Renko chart for any stock is between the points 100 – 105 and a Brick for this price range has been already formed. As you know that prices in the market keep fluctuating and we use these price charts to analyse them. Market may hit the price of Rs.106 and then it can come back to Rs.102, than Rs.108 but all during this, no single Brick will be formed.
In order to form new Brick, either the price need to rise by Rs.5(equal to the Brick size) from boundary of previous brick or it need to fall by Rs.5 from the lower edge of Brick i.e. to Rs.95 from Rs.100. New Brick will not form till the market keeps fluctuating between 95-100 and not touching or crossing these limits.
As the price touch Rs.110, one new green Brick will form and if now, the price go back to 109 again, the Brick is not going to retrace back, no fluctuation or change will be observed in the chart. If it would be a candlestick chart, than the candlestick in it would have been moving every price change and if it have to retrace back, it would simply leave a wick on its upper or lower side depending on the direction of retracement which shows that the market have touched this point in that particular period of time. Renko Bricks only form , and never retreats.
If price change to Rs.118 suddenly, than the change in price Rs.118 – Rs.110 = Rs.8 = Rs.5 x 3 +3, this means that 3 candles can be formed next.
Repainting in Renko ChartsIn the discussion till now, we saw that Renko charts formation does not depend on time. Renko Bricks form when a certain price change occurs without any respect to time. Once a Renko Brick has formed , it is permanent there and if the price moves back, new brick needs to be formed after falling to a certain level.
But in some trading softwares, a feature of time based retracement feature known as Renko Repainting. In some charts, Renko Brick is shown to move with time. Like in the above case of Rs.118, a new Brick from Rs.115 will start and will move with the price live. But this Brick is shown in a lighter color relative to other bricks which reveal that this Brick is not permanent. If the price goes back to Rs.116, this light colored Brick will retrace back to Rs.116 and no Brick will be shown from Rs.116 -Rs.118, this is what we call as Repainting.Once this Brick touches Rs.120, it will become permanent and its color will become darker. Now,this Brick can not repaint if the price falls and only a new Brick will have to form. In zerodha , we have two types of charting :
- ChartIQ – default charting style
- TradingView – can be chosen by going to your profile there
You must be knowing that we select time frame like 1 minute, 15minute, 1month or 1week which represent the time for which, one candlestick represents the price action. When this period overs, a new candle starts. Though , Renko Bricks are not based on time, but we do select the time for Repainting period. Suppose if we select the time period to be 15 minutes. So, any number of bricks forming in last 15 minutes will not be permanent i.e. all of them can repaint and move with time. Here, I have only tried to describe repainting. It is not specified whether it is good or bad. Though, a longer period of time for repainting of Bricks is not good as you will not be able to take your decisions firmly.