The renko chart, shown in Exhibit 7.'1,,i s also termed a neri, training,or zigzag chart. The renko charts looks similar to the three-bar break chart since they both have lines that look like blocks. The individual blocks that form the renko chart are sometimes referred to as bricks (the term renko may come from "renga," which is the Japanese word for bricks). As we saw in Chapter 6, in a three-bar break chart, another line is added as the market moves in the direction of the prevailing trend, no matter how small the move. For example, if the market closed today by even one tick higher, a new white line would be added to the three-line break chart if the prior line was white. However, for a renko chart, a line is drawn in the direction of the prior move only if a fixed amount has been exceeded. For example, if there is a white brick on the renko chart, the market has to advance by a predetermined fixed amount before a new white brick can be drawn. Another difference between the renko and three-line break chart is that the lines in the three-line break chart are of different sizes, while the bricks in a renko chart are all the same size.

The renko chart uses closing prices. The first step is to choose a price range unit. This price range point is the minimum amount the market must move before a renko brick is drawn. The price range point also serves to set the height of the brick. Thus, a five-point renko chart would have bricks that are five points tall. This will become clear after I go through the following detailed example. An important aspect of the renko chart is that rising lines are denoted by equal size white bricks and falling lines are denoted by equal size black bricks. Thus, no matter how large the move, it is shown on the renko chart as equal sized bricks. For example in a five-point renko chart, a 20-point rally is displayed as four five-point-high renko bricks.

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