Renko charts are non-time based charts that are only concerned with price movement. Renko charts are "time independent" charts that do not have constantly spaced time axes. They are named after the Japanese word for bricks or "renga". Here is a Renko chart of the S&P 500 this morning which has just ticked a sell signal:

A Renko chart is constructed by placing a ‘brick’ in the next column once the price surpasses the top or bottom of the previous brick by a predefined amount. You could use a fixed movement in cents, or percentage, but a more dynamic and popular technique is to use a number of ATR (Average True Range) for each brick, say a move of 1 x ATR.

The Average True Range in simple terms is the average range from top to bottom that the price is trading each day averaged over the last 14 periods.

So the daily ATR for BHP is the range it has traded in, from top to bottom, each day for the last 14 days, averaged. At the moment it is moving 77c a day from top to bottom.

So back to Renko charts. If BHP moves more than 77c above the top of the last brick or 77c below the bottom of the last brick a new brick is plotted. So the price has to move more than the Brick Size (1 ATR) above the top or below the bottom of the last brick on the chart, before a new brick is added in the next chart column.

Hollow White bricks (or green bricks on the above chart) are used when the direction of the trend is up, while solid black (or red) bricks are used when the trend is down - much like candles. Only one type of brick can be added per time period. Bricks are always with their corners touching and no more than one brick may occupy each chart column.

Note - Prices may exceed the top (or bottom) of the current brick without a new brick being added because new bricks are only added when prices completely "fill" the brick. For example, for say a 5c chart (if 1 x ATR is 5c say), if prices rise from 98 to 102, the green brick is plotted that goes from 95 to 100 BUT the greeen brick that goes from 100 to 105 is NOT DRAWN until the price hits 105. Until then, the Renko chart will give the impression that prices stopped at 100. Don’t worry if I just lost you.

The "Average True Range (ATR)" method is the most popular, using the value of the ATR indicator to determine the brick size. You can use a fixed number of cents but the ATR indicator adjusts the significance of the brick depending on the volatility of a stock rather than applying the same rules to a boring stock as a volatile stock. The ATR method  "automatically" finds relevant brick sizes regardless of the value of the stock selected. The average true range over 14 days (or weeks) is the default value for Renko charts.

Interpretation – For our charts, Green bricks are bullish, Red bricks are bearish - that's the simplest interpretation of Renko charts. Renko charts are good for identifying trends and trend direction because they screen out moves that are less than the brick size. Like all non-time based charts, they get rid of the noise. Consequently, trends and turning points are easier to spot and follow.

In order to avoid whiplash periods, some traders will wait until 2 or 3 bricks appear in a new direction before going with the new trend and taking a position. If you were using 1 x ATR bricks, obviously a change of trend showing two red bricks after a series of green bricks (an uptrend) would suggest the stock has moved 2 x ATR, which is a common stop loss setting (a fall of 2xATR).

So Renko charts can rather neatly highlight when you should sell on a stop loss (two yellow bricks in a row). Or you could set the brick size to 2xATR and sell when one brick ticks in the opposite direction.

Renko charts are also effective for identifying key support/resistance levels. Trading signals are generated when the direction of the trend changes which is apparent when the bricks change colours.

This is a traditional Renko chart - "up" bricks are hollow, and "down" bricks are black.

The benefits of a Renko chart:

• Simple - Patterns are more clearly identified.
• Trading signals like trend changes and line breaks are easier to spot.
• Less noise.
• Charts are much easier to read.

Here is the FMG Daily Renko chart using 1x Daily ATR bricks:

Here is the Telstra daily Renko chart using 1x Daily ATR bricks - on a 2xATR stop loss you would have sold it after that second red brick in the recent downtrend.

And for investors (as opposed to traders) there are weekly charts - slower moving, identifying the bigger trends and turning points. This is the Telstra Weekly Renko chart.

For long-term investors, the tendency is to push the time period out from Daily to Weekly. In these charts the bricks represent 1xATR over 14 weeks not 14 days. It is obviously a bigger number using weekly charts - the daily ATR for BHP is 77c but it is 186c for BHP on a Weekly chart. So when using a weekly Renko chart the bricks are less frequent, you get fewer signals, but it identifies the bigger trends. The disadvantage od weekly charts is that weekly charts indicate turning points a long time after they started, which means the bigger the brick size setting, the later you trade on a change in trend.

A Rule of Thumb - is that if a stock or an index changes direction by two bricks (2x ATR – a standard stop loss size), you sell or buy.

AN EXAMPLE

Here's the Daily Normal Candle chart of the ASX 200 compared to the Daily Renko chart of the ASX 200 showing a bar every time it moves 1 x the daily ATR (currently 65 points) – you can see the recent peaks and troughs more clearly. Note that Renko charts are not time based, they only print a brick every time the index moves 1 x ATR (moves up or down 65 points). So in volatile times the time scale is long and when it does nothing a lot, its shorter because more time goes past before another brick is printed.

Here's the Weekly Normal Candle chart of the ASX 200 compared to the Weekly Renko chart of the ASX 200 showing a bar every time it moves 1 x the daily ATR (currently 159 points) – you can see the recent peaks and troughs more clearly. Note that Renko charts are not time based, they only print a brick every time the index moves 1 x ATR (moves up or down 159 points).

Weekly Candle chart of the ASX 200.

Weekly Renko Chart of the ASX 200.

SO WHAT WOULD YOU DO HERE

• NASDAQ Weekly Renko Chart - it's a weekly chart, so it's for investors (Strategy Portfolio). No need to do anything. Hold until there are two red bricks in a row.

• NASDAQ Daily Renko Chart - On the Daily chart (traders) there is only one red brick so you wouldn't sell until there is at least another red brick, if not when the third one prints in a row. But you would be on alert at this point.