The Renko chart is a Japanese chart type that has been brought to the West by Steve Nison, in his book Beyond Candlesticks: New Japanese Charting Techniques Revealed. The Renko chart is based on the Point and Figure graph (P & F). This is called the ‘renko’ chart because of its structure. The word ‘renko’ comes from the Japanese word ‘renga’, meaning (stone) brick, and the graph structure of Renko shows a pile of bricks or boxes arranged diagonally in a trend with each brick having the same dimensions.
Like the Point and Figure graphics, new bricks are only drawn on Renko charts when the closing price has risen or decreased at least by a predetermined value, above or below the previous brick or box. Each brick or box is drawn for each multiple of the value specified that the Price Action has exceeded the top or the bottom of the previous brick. Thus, the price movement of a certain time period or time frame can be represented by a single brick, many bricks or no bricks.
For example, if the graph has a predetermined 5-point size, and the last part of the last brick is 100, a brick with a bullish indication is only drawn when the PA in the next time period closes above 105 with additional bricks drawn for every five points higher of the closing price. So, if the lid is at 103, no bricks are drawn because the price has not risen beyond the prescribed amount, and if the price closes 123 points, four rising bricks will be drawn: the first one from 100 to 105, the second of 105 to 110, the third from 110 to 115, and the fourth from 115 to 120. Each of these bricks is drawn in the next column on the right, making the graph independent of time. Also, in case the price moves to 123, the last part of the last brick will be 115. In order for the bearish brick can be drawn, the price in the following time period should be closed at least five points below the last brick, which has the lowest 115. In other words, it should be closed at 100 or lower for at least one bearish brick to be drawn.
High and low levels in a given time period are ignored in the Renko chart, and while the closing price is used to determine the number and direction of the bricks to be drawn. The closing price is actually not as important as the top or bottom of the last brick.