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Understanding Hollow Candles: The Basics

Hollow candles are a popular technical analysis tool used by traders to analyze price movements in financial markets. They are visually similar to regular candlestick charts but have a different representation of price action. This article will explain how to read hollow candles, how they differ from traditional Japanese candlesticks, and their advantages and limitations.

How to Read Hollow Candles

To read hollow candles, you need to understand the components of each candlestick and what they represent.

Like traditional Japanese candlesticks, hollow candlesticks have a rectangular body that represents the opening and closing prices of a specific time period, and wicks (also known as shadows or tails) that represent the highest and lowest prices of the time period.

Hollow candlesticks differ from Japanese candlesticks in how the fill and color of the candlesticks are determined.

  • The fill of the candlestick’s body is determined by comparing the closing price of the current candlestick with the opening price of the current candlestick.
    • Hollow = The current candlestick’s close is greater than the current candlestick’s open.
    • Filled = The current candlestick’s close is less than the current candlestick’s open.
  • The color of the candlestick is determined by comparing the closing price of the current candlestick with the closing price of the previous candlestick.
How to read hollow candles
  • Green or White = The current candlestick’s close is greater than the previous candlestick’s close.
  • Red or Black = The current candlestick’s close is less than the previous candlestick’s close.

It’s important to note that the colors used may vary from the traditional green/white and red/black depending on your trading software and customizations.

Hollow Candles vs. Traditional Japanese Candlesticks

Hollow candles can provide traders with a more accurate and intuitive view of market sentiment and trends than traditional Japanese candlesticks.

The color of a traditional Japanese candlestick is used to interpret market sentiment for a specific time period. A green or white traditional candlestick means that the closing price was greater than the opening price of a specific time period. A red or black traditional candlestick means that the closing price was less than the opening price of a specific time period.

  • Green or white traditional candlestick = bullish sentiment
  • Red or black traditional candlestick = bearish sentiment

The color of a hollow candlestick, on the other hand, factors in the close of the previous candlestick, while the fill represents the relationship between the close and open of the current candlestick.

  • Green or white hollow candlestick = most bullish sentiment
  • Red or black hollow candlestick = bullish sentiment
  • Green or white filled candlestick = bearish sentiment
  • Red or black filled candlestick = most bearish sentiment

By comparing the closing price of the current candlestick with the closing price of the previous candlestick, hollow candles can provide a clearer indication of the momentum of the market. For example, if a series of hollow candles with long bodies and short wicks are forming, this can indicate that the market is experiencing strong buying pressure and that the trend is likely to continue. Conversely, if a series of filled candles with long bodies and short wicks are forming, this can indicate that the market is experiencing strong selling pressure and that the trend is likely to continue.

In addition, by focusing on the relationship between the closing prices of consecutive candlesticks, hollow candles can provide a more accurate picture of key levels of support and resistance. For example, if a hollow candle forms after a series of filled candles at a key support level, this can indicate that the market has found support and that the price is likely to rise. On the other hand, if a filled candle forms after a series of hollow candles at a key resistance level, this can indicate that the market has found resistance and that the price is likely to fall.

Japanese Candlestick vs hollow candles

Pros and Cons of Hollow Candles

Here are some potential pros and cons of using hollow candles:

Pros:

  1. More information: Unlike traditional Japanese candlesticks, hollow candles show how the closing price of the current time period compares with the closing price of the previous time period.
  2. Easy to read: Hollow candles are easy to read and understand, especially for traders who are new to technical analysis. They provide a clear visual representation of price movements and can help identify trends and patterns in the market.
  3. Clear signals: Hollow candles can provide clear signals for trend changes and support and resistance levels, making it easier for traders to make informed trading decisions.

Cons:

  1. Limited use: Hollow candles are not as widely used as traditional Japanese candlesticks, which means that there may be fewer resources available on how to interpret and use them effectively.
  2. Confusion with traditional Japanese candlesticks: Hollow candles can look similar to traditional Japanese candlesticks. This can lead to confusion for traders who are used to using traditional candlesticks, potentially leading to misinterpretation of market trends.
  3. Subjectivity: Like all types of technical analysis, the interpretation of hollow candles can be subjective. Different traders may see different patterns and trends in the same chart, which can lead to conflicting trading strategies and potentially different outcomes.

Hollow candles can be a useful tool for traders to quickly identify trends and price movements. However, they have their limitations and should be used in conjunction with other tools and analysis techniques.

The Bottom Line

In conclusion, hollow candles are unique because they offer traders a different perspective on price action compared to traditional Japanese candlestick charts through the determination of each candlestick’s fill and color. Hollow candles are a valuable addition to any trader’s toolkit and can help enhance their ability to make informed and profitable trades in the financial markets.

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