07/16/2019 |
Raindrops vs. Japanese Candlesticks: More Insights With Zero Noise
Raindrop Charts are a new kind of financial chart designed to let you to see what’s happening in the market from a unique perspective. Raindrops are built from the same market data as Japanese candlesticks, but incorporate volume into the final visualization, showing you how price and volume play out over time.
The left side of a Raindrop represents the first half of the period and the right side represents the second half of the period. Each half is essentially a small Volume at Price, or Volume Profile, chart (that has been rotated 90 degrees). This lets you see how market sentiment changes by comparing the first half of each period’s histogram to second half’s histogram. You can read more about Raindrops and how they are constructed in the official white paper.
Telling a More Complete Story
The best way to see the benefits of Raindrop charts over conventional Japanese candlestick charts is to look at an example. In the image above, the 30-minute center Raindrop (blue circle, marked B – long green one in the middle) tells a much more comprehensive story about volume and price action than the corresponding 30-minute candlestick (red circle, marked B).
Let’s dig into that for a moment:
- The Japanese Candle (B): The price has moved upwards. There’s no lower wick, means that price never went lower than Open, which probably indicates a strong base and price movement.
- The Raindrop (B): The price has moved upwards. There was nearly no volume behind lower 70% of the Drop’s price range; all the real trading was happening in upper 30%. During the first 15 minutes, volume was half of what it was during the last 15 minutes, which probably means that market was pretty sure about the price level as soon as it has reached it.
Now, to dive deeper, compare this Raindrop visualization to the 5-minute Candles on the left (which show a more granular story), and you will see that the 30-minute Raindrops provide a high degree of granularity, even at higher time frames. Now let’s take a bigger chart and demonstrate the real power of Raindrop charts.
Comparison: Raindrops vs. Candles on ADSK
The key difference between Raindrops and Candles is that Candles are constructed using traditional Open and Close prices, which I perceive as random price breaks: set by the passage of time, and containing no unique information about the price other than its timestamp. Conversely, Raindrops use Left and Right Volume-weighted Average prices (VWAPs) instead, which contain a deeper level of information about movements in more than just price — it shows the sentiment of a market.
In the above illustration, you can see a clear difference at candle E, but let’s walk through them one by one.
| Period | 30 Minute Candlestick | 30 Minute Raindrop |
| A | Smaller red body, mediocre upside wick and short lower one. Candle’s range is rather usual (see the candles on the left).
Conclusion: Price has moved down a little bit. |
Volume-weighted price is the same through both halves of the period. We call it a Blue Doji and believe it reflects a “True Doji” for those familiar with the term.
Conclusion: There’s a consensus on market, and things are likely to change pretty soon. We have observed these forming at future support or resistance levels, or before volatility. |
| B | Price has moved up, but closed at like 50% of a range. It might even be a Bullish Engulfing, should this Low be slightly lower. | Price has moved upwards significantly, but on second half of period there was no clear consensus about the market price: Nearly the same volume was traded on top of range and on lower 40% of range. |
| C | All hell broke loose. We have started high and ended low, candle has nearly no wicks. That’s a good and bold Bearish Engulfing.
Conclusion: Market was pretty bold with the movement. |
Price range was pretty wide, but all the real stuff was happening mostly in the middle of this range, through both halves of period.
Conclusion: Market was not quite sure if it goes down or not. |
| D | Just a red candle, with wicks being probably slightly longer than usual. | During both halves of period, vast majority of volume was traded in the upper 50% of a price range. Left and Right prices are nearly the same. This drop was pretty close to becoming a Blue Doji. |
| E | This is a Hammer. Reversal is likely to happen (in 60% of cases, as per Bulkowski).
Conclusion: Reversal is likely to happen. |
During first half of period, the market was very unsure about the price. But during the second half, most volume was traded in upper 50% of a range.
Conclusion: This is a reversal (at least, short-term one). |
| F | Bearish 3 Line Strike + Bullish Engulfing. Bullish reversal is likely (84% chance). The price obviously went up.
Conclusion: Market moves higher, the movement seems to be strong. |
Marked moved higher. The dominating volume was traded during second half of period, and it was in the top 10% of period.
Conclusion: Market was eager to go upwards, it was a bold movement. |
| G | Still moving up, forming a new maximum. | Market moved up even more. But during the second half of period, almost two times less volume traded compared to the first half.
Conclusion: The market moved higher, but might lose future momentum. |
| H | Price still moves up. Candles’ range obviously narrows down; might be a sign of losing momentum. | In general, the same story as on drop G, but price range has narrowed down. Market still loses the inertia. |
| I | Bearish Engulfing, we’re likely to go down. | Huge uncertainty during first half of period (take a look at these 3 peaks on VbP chart!). Market has come to consensus during second half, and this consensus price is in the lowest 20% of a Drop’s price range. But this consensus is not looking bold, given that summary volume during second half was like 2x lower than for first half. |
Key Takeaways
Many of the traditional candlesticks form patterns. In order to get the most out of candlestick charts, it is helpful to have an understanding of these common candlestick patterns.
With the Raindrops, the charts are naturally intuitive. You need nothing but common sense to see market flowing from one point of balance to another. It is clearly visualized with the volume histograms.
Raindrops tell simple yet informative stories. You don’t need to memorize patterns or complex rules in order to understand them. Raindrops give you a much deeper look into the market’s sentiment flow, while still maintaining pretty low amounts of noise.
