What Are Raindrop Charts?

Origin of Raindrop Charts

Introduction of Raindrop Charts:

Conceived by Ruslan Lagutin, CTO of TrendSpider, Raindrop Charts emerged in October 2018 as an innovative approach to visualizing price action. These charts were designed to encapsulate time progression and volume fluctuations, deliberately omitting conventional metrics such as opening and closing prices for a given period, which can be viewed as somewhat arbitrary.

Exclusive to the TrendSpider platform, Raindrop Charts represent a specialized charting technique proprietary to this advanced technical analysis software. TrendSpider offers automated technical analysis solutions that assist traders in enhancing their decision-making process and refining their trading strategies with greater precision.

How to Read Raindrop Charts

To effectively read Raindrop Charts, understanding the components of each Raindrop and their representations is crucial:

1. High: It represents the highest price achieved during the specified period.

2. Low: It signifies the lowest price reached during the specified period.

3. Left dash: It represents the Volume-Weighted Average Price (VWAP) for the first half of the period. VWAP is a measure of the average price weighted by the trading volumes.

4. Right dash: It indicates the VWAP for the second half of the period.

Additionally, the shape of each Raindrop combines the area charts of the two halves of the period in a rotated 90-degree position.

Furthermore, the colors of Raindrops convey important information:

- Red Raindrop: This color is assigned when the VWAP for the first half is greater than the VWAP for the second half.

- Green Raindrop: This color is assigned when the VWAP for the second half is greater than the VWAP for the first half.

- Blue Raindrop: This color is assigned when the VWAPs for both halves are equal.

By analyzing these components and color codes on Raindrop Charts, traders can gain insights into price levels, volume profiles, and potential shifts in market sentiment.

Basic Raindrop Patterns

Raindrop charts are a relatively recent innovation in technical charting that offer a novel way to visualize price and volume data. Developed by the technical analysis platform TrendSpider, Raindrop charts combine elements of traditional Japanese candlestick charts and volume-weighted average price (VWAP) data. They aim to provide a more comprehensive picture of market sentiment during a specific period.

The patterns you mentioned are indeed part of the Raindrop chart analysis and can be useful to traders who are familiar with them. Here is a brief explanation of each pattern:

1. **Bullish Raindrop**: This pattern suggests that buying pressure has increased during the second half of the trading period, with the VWAP moving higher. It indicates that buyers are gaining control, which could potentially lead to higher prices.

2. **Bearish Raindrop**: The opposite of the bullish variant, a bearish raindrop shows that selling pressure has dominated the latter part of the trading period, with the VWAP moving lower. This could be a sign that sellers are taking control, possibly leading to a price decline.

3. **Neutral Raindrop / Blue Doji**: When the VWAPs of both halves of the period are approximately equal, it indicates a balanced battle between buyers and sellers. This is reminiscent of a doji pattern in candlestick charting, which often signifies indecision and can precede a trend reversal.

4. **Balloons**: This pattern suggests a significant accumulation of volume at higher price levels, which could indicate a strong upward price movement. The "balloon" shape reflects the concentration of volume.

5. **Flip**: A "flip" occurs when there is a stark contrast in the position of the VWAP within the body of the Raindrop from one period to the next. This suggests a potential change in the sentiment of market participants.

6. **Double Flip**: The double flip is essentially two consecutive flips, indicating a more pronounced volatility and potential for trend reversals. The bearish and bullish variations depict distinct shifts in market dynamics, with the bearish double flip showing a loss in upward momentum and the bullish double flip indicating the opposite.

While these patterns can be insightful, it's important to remember that no single trading indicator or charting method is foolproof. Experienced traders typically use a combination of technical indicators, chart patterns, and other forms of analysis to make more informed trading decisions. Moreover, Raindrop charts are just one of many tools available to traders, and their effectiveness may vary depending on market conditions and the asset being traded.

Advantages of Raindrop Charts

Raindrop charts offer several advantages that enhance the analytical capabilities of traders and market analysts. Firstly, they provide an innovative amalgamation of price action and volume data within a single visualization, thereby offering a multifaceted view of market sentiment over a specific time frame. The integration of volume-weighted average price (VWAP) information allows for a more nuanced understanding of where the majority of trading activity occurred, as opposed to traditional candlestick charts that focus solely on the opening, closing, high, and low prices.

Moreover, Raindrop charts facilitate a deeper comprehension of intraday price movements by highlighting the distribution of volume across different price levels within the specified period. This volume distribution helps identify areas of buying or selling pressure that may not be immediately evident in conventional charting methods.

Additionally, the visual patterns present in Raindrop charts, such as bullish and bearish indicators, can serve as supplementary signals to traders alongside other technical analysis tools. These patterns can offer critical insights into potential reversals or continuations in market trends.

Finally, Raindrop charts aim to filter out some of the noise associated with high-frequency trading and minor price fluctuations. By emphasizing the significance of volume in price establishment, these charts may present a clearer picture of market dynamics, which can be especially advantageous during periods of uncertainty or volatility.

In essence, Raindrop charts extend an elevated level of detail and analytical depth to investors, promoting a more informed and strategic approach to market analysis and decision-making processes.

The Bottom Line

Raindrop charts are becoming a more prevalent instrument among traders for conducting thorough market analyses. These charts offer an enhanced visualization of both volume and price activity throughout a designated timeframe, thereby aiding in the detection of prevailing market trends, delineation of support and resistance thresholds, identification of imminent breakouts, and other key trading insights.