Last week,  you were introduced to Renko charts, their construction and how they can be used as an alternative to the regular candlestick charts one has been using.

Today, I want to dig deeper into how one can explore traditional chart analysis to improve your understanding of Renko charts.

Chart Patterns

The strength of Renko lies in its ability to filter out the noise and show the trends clearly. You can see the chart below for Indigo (brick size: 15 ~ 1%) that exhibits that.

As a result of this one can not only clearly see the price movement but also define important patterns like:

  • Clear Supports and Resistances at market highs and lows
  • Triangles
  • Double Tops and Double Bottoms and so on.

The chart for Infy here shows us clearly defined supports, resistances and trendlines. The chart for Indigo shows us Triangle formations.

Renko & Bollinger Bands

Using Bollinger Bands on Renko signal trends well. There are many trade setups possible using Bollinger Bands. These include trend changes at key support & resistance levels and construction of bands to signal changes in volatility. One interesting trade setup is a reversal brick on the edge of the bands.

The figure below displays a daily chart for ICICI Bank(brick size: 4), with a Bollinger Bands(20,2) overlaid. Point A on Fig 1, and Points B,C,D on Fig 2 show upside reversals and point E on Fig 2 shows us downside reversals. Look for direction changes in the zone of the middle band to exit, or ride these trades with trailing stop losses.

Renko & Moving Averages

Moving averages play a critical role in analyzing Renko charts. On this daily chart for AXISBANK, one can see how the 20 EMA and 50 EMA play a decisive role in acting as supports in upswings and resistances in downswings.

Renko & Fibonacci Averages

A powerful method to confirm price changes is to overlay Renko charts with Fibonacci retracement lines. In the Fig for ASIANPAINT below, we can see that the Renko chart bricks formed a low to high wave and then made several attempts to retrace back to the highs, first from the 23.6% retracement level and then from the 50% levels. A trader may want to trade the retracement attempt and use Renko chart bricks as a guide.

In the next week, I will discuss some important tactical rules and steps one must follow when trading Renko, followed by using Renko as a sentiment indicator and some risk management guidelines.

Stay tuned.