There are many different types of charts used by traders and financial analysts to outline the changes in price action over a period of time like Traditional Japanese Candlesticks (and price bars), Hollow Candlesticks, Heikin Ashi, etc.
However, many of these chart types do not recognize trading volume, leaving no other choice but to resort to a secondary sub-chart or some other indicator. Also, most of the time, these secondary sub-charts are a simple ‘volume underlay’ chart, a bar chart that shows volume by period along the bottom and are very high level in nature often compromising context, granularity, and detail.
As a result, the traders are forced to make decisions using incomplete information. This is where the Raindrop Charts™ from TrendSpider fills the gap by providing the traders with the volume and price data combined into a single visualization while also filtering out some of the distractions like arbitrary open and close prices.
In this documentation, we will explore the following:
- Body & Key Data Points
- Raindrop Colors & Relative Position
- Examples of Distinct Raindrop Formations
- Key Features of Raindrop Charts™
Let’s get started 🚀
Body & Key Data Points
The Raindrop visualization illustrates price and volume movement instead of just the price change, where each bar known as a Raindrop, covers a fixed period of time (such as one hour) and includes a body and four key data points as illustrated below:
It represents the Volume by Price for each half of the time period (shown as the left and right sides of the period).
It represents the highest price for the period.
It represents the lowest price for the period.
It represents the Volume-Weighted Average Price (VWAP) for the first half (left side) of the period.
It represents the Volume-Weighted Average Price (VWAP) for the second half (Right side) of the period.
Raindrop Colors & Relative Position
Each Raindrop is colored depending on the relative position of the Left and Right volume-weighted average prices.
|Raindrops where the Left volume-weighted average price is greater than the Right VWAP price
|Raindrops where the Right volume-weighted average price is greater than the Left VWAP price
|Raindrops where both the Left VWAP price and Right VWAP prices are equal
Please refer to the illustration below to understand how all three relative positions for a drop appear on the chart.
Examples of Distinct Raindrop Formations
In Raindrop charts, the amount of volume is illustrated by the width of a Raindrop at any particular price level, which will vary based on the volume of transactions traded at that price level.
The width on both sides of a Raindrop is plotted using the same scale to make them easy to compare. Let’s have a look at a few potential distinct Raindrop formations.
In this example, a “flip” Raindrop has been formed in which the majority of the trading volume was at a higher price during the first half of the period (left side) and then moved to a lower price during the second half of the period (right side). As far as volume is concerned, it is equal on both the left-hand side and right-hand side indicating that the market is moving in one direction.
In this example, the majority of trading volume starts and ends around the same price levels, but volume doubles during the second half of the Raindrop (volume thickness at right is greater than volume thickness at left). It reflects that the market has preserved its sentiment throughout the whole period.
In this example, a blue raindrop has been formed because the VWAP prices are the same on both sides of the bar. On closer observation, you will find that the volume on the right is slightly lower than the volume on the left, a Doji-like formation indicating indecision and tight trading.
In this example, a long raindrop can be observed which typically forms when there is a wide trading price range, but most of the volume is concentrated in a tighter sub-range. This Raindrop also illustrates another important point: the function of the VWAP dashes. It can be seen that the Left Mean (VWAP) price resides inside the left volume histogram, meaning that there was little to no volume during the lower prices at the left part.
In this example, a thick, even, and long raindrop has been formed which appears when a market trades in a wide price range without any obvious consensus along the way. As can be observed, the right and left mean lines are close to each other and the volume is relatively the same general thickness on both sides of the Raindrop. This is a rare raindrop because there is about the same level of volume traded at all different prices with no clear peak or consolidation point.
Key Features of Raindrop Charts™
There are a number of unique properties and features of Raindrop Charts™ from TrendSpider,
especially when compared against traditional candlestick charts as listed below:
- Reduces Noise & Distractions
- Visualizes the Flow of Sentiment
- Identifies True Price Consensus
- Volume-weighted candlestick patterns
- Volume-weighted trendlines
- Volume-weighted indicators
To learn more about these features in detail, please refer to this Whitepaper