Of all of the features available on the TrendSpider platform, few are more intriguing than our Raindrop Charts. Raindrop Charts are a unique-to-the-platform candlestick style that allows our users to easily see the volume distribution across a candle.
There are multiple different types of Raindrop candles that can occur, but certainly, the rarest is the Blue Raindrop. In this article, we’ll be highlighting some very interesting properties of Blue Raindrop candles, as well as how to utilize them in your analysis!
How Is A Blue Raindrop Formed
By separating each candle into two halves, a left and a right side, traders are given a glimpse of how the average price paid varies from the first half to the second half of the time frame. This is observed using the small, horizontal slashes found on either side of the candle, which represent the volume-weighted average price for each half of the time frame.
As seen in the image above, if the volume-weighted average price paid from the first to the second half of the time frame increases, the candle is colored green. If it decreased, the candle is colored red. Both red and green raindrop candles are quite common.
Blue Raindrop candles are formed when the volume-weighted average price paid for an asset is the same throughout the course of a candle. This is a unique, and rare occurrence simply because price tends rarely to move in a straight line. Whether it’s buyers or sellers, usually one side of the trade is in control. With that in mind, a Blue Raindrop can represent a true ‘Tug-of-war’ between buyers and sellers.
Blue Raindrop Rarity
The rarity of a Blue Raindrop increases due to two factors: Volume, and time. The more volume that’s traded, the more likely the average price is to move higher or lower from the first to the second half of the period. As well, the longer the period, the more likely price is to move higher or lower.
This idea can be visualized in the charts below. On the left is a 15-minute chart of a name that trades less than one million shares per day, on average. Note there are six Blue Raindrops over a seven-day period. On the right is a weekly chart of a name that trades over 400 million shares per week, on average. Note there are only four Blue Raindrops over a 2.5-year period.
Now that we understand how Blue Raindrops are created and the rarity with which they occur, let’s go over some ways they can be utilized to make trading decisions.
Spotting Reversals Using Blue Raindrops
Since we know that Blue Raindrops represent a ‘Tug-of-war’ between buyers and sellers, one of the best ways to utilize them is as signals for potential trend reversals. Be it short or long-term, if price is trending in one direction or another, then either buyers or sellers are in control. When there’s a battle for control, what often occurs next is a reversal.
Historically, traders have long utilized candlestick patterns in order to spot these reversals in the market. Hammers, Engulfing, and Doji candles can all be used in this way. However, because they include volume within their calculation, we like to consider Blue Raindrops among the most valid of the reversal candle styles.
Take for example the daily chart of AAPL below. As price comes into swing highs and lows, just before it reverses, Blue Raindrops can be found. This is a perfect representation of the ‘Tug-of-war’ between buyers and sellers that we discussed above.
Blue Raindrops As Levels Of Support Or Resistance
When price breaks down below a previous Blue Raindrop level and then comes back to test that level, it has a tendency to reject on the first test. The same is true when price extends to the upside, past a previous Blue Raindrop level. When price comes back in to test the level, it often can find support on the first test.
The reason for this is simple. Price tends to form memory at levels of elevated indecision. These levels of indecision represent important support and resistance points, and before price can continue extending higher or lower, it will often go back and test these important points to make sure they hold.
Scanning, Alerting, and Strategy Testing Blue Raindrops
There are many ways to utilize TrendSpider’s advanced tools to make discovering Blue Raindrops quick and easy. Traders can utilize the Market Scanner to find names that are currently forming or have recently formed Blue Raindrops. Multi-factor Alerts can be used to alert traders to Blue Raindrops forming, and the Strategy Tester can be used to advise traders on how a stock performs after a Blue Raindrop has formed.
In order to scan for a Blue Raindrop, first be sure to switch the candle style to the ‘Raindrops’ option.
Once you’ve done that, choose ‘Add Parameter’ and then select ‘Candlestick Pattern’. From there, you can type ‘Blue’ into the search bar and it will auto fill as ‘Raindrop/Blue Doji’. Do note that raindrop candles are only available from the 10-minute to monthly time frames at this time.
On the left-hand side of this image, note the shared scanner list. When ‘Blue’ is typed into the search bar above that list, it will yield all of the pre-made ‘Blue Raindrop’ scanners that are currently available.
In order to create an alert for a Blue Raindrop occurring on your favorite name, simply click the three dots next to the ‘Alerts & Bots’ button and choose the ‘Create a multi-factor alert’ option.
Next, just like in the Market Scanner, be sure to first select the ‘Raindrop’ option from the candlestick dropdown menu. Then proceed to script the desired conditions the same way as in the market scanner.
Once your conditions are scripted, choose when the alert is meant to expire and how many triggers you’d like to receive, and then click ‘Create Alert’ in the bottom right-hand corner. Your alert will stay active for the duration you choose and can be re-activated via the ‘alerts’ widget in your sidebar.
Understanding how a stock tends to react after a Blue Raindrop has formed can be key when attempting to utilize them. Blue Raindrops can be used as both entry and/or exit criteria, and are inputted via the ‘Add Parameter’ or ‘Add Script’ options on the entry side and the ‘Add Script’ option on the exit side. The image below shows a simple test in which we go long when a Blue Raindrop appears and then sell when the next one appears. It actually works quite well!
The Bottom Line
The Blue Raindrop is a rare candle that can provide traders insight into levels of indecision on the chart. These levels of indecision can prove to be important support/resistance levels that can lead to changes in trend. The TrendSpider platform has many tools designed to make finding these candles, and then utilizing them in your trading plan, quick and efficient!
As always, if you have any questions, feel free to reach out to us via the ‘Contact Us’ button in the bottom right-hand corner of your chart.