Understanding Hollow Candles: The Basics

How to Read Hollow Candles

In analyzing hollow candles on a chart, it's essential to interpret each candlestick's structural elements and their market implications.

Hollow candlesticks, akin to traditional Japanese candlesticks, consist of a rectangular area termed the ‘body’, which delineates the open and close prices within a defined interval, as well as ‘wicks’—also referred to as ‘shadows’ or ‘tails’—illustrating the extreme high and low prices during the same period.

The distinction between hollow and traditional Japanese candlesticks lies predominantly in the criteria for assigning the body's fill and color:

The body of a hollow candlestick is adjudicated to be hollow or filled based on the relationship between the closing and opening prices of that specific candlestick:

- A hollow body is formed when the closing price exceeds the opening price.

- A filled body is depicted when the closing price is below the opening price.

The hue of the candlestick reflects the comparison between the closing price of the candlestick in question and the closing price of its predecessor:

- If the current candlestick’s closing price is higher than that of the prior candlestick, it may be colored differently to indicate an upward trend.

- Conversely, if the closing price is lower than the previous candlestick’s, the color may change to convey a downward trend.

Understanding these nuances allows traders to extract valuable information about market sentiment and price direction within the specified timeframe.

Hollow candlesticks offer traders an enhanced perspective into market psychology and prevailing trend directions, potentially furnishing a more precise assessment than that provided by traditional Japanese candlesticks. The coloration of traditional Japanese candlesticks serves as a gauge for determining market temperament within a specified temporal frame:

- A candlestick that is green or white symbolizes a condition where the closing price was higher than the opening price, signifying bullish market sentiment.

- Conversely, a candlestick colored red or black indicates that the closing price was lower than the opening price, reflecting bearish sentiment.

For hollow candlesticks, the color is determined not solely on the open and close of the current period but also in context with the prior period's close, while the hollowness signifies the close-open relationship for the current period:

- Green or white hollow candlestick: signals the strongest bullish sentiment.

- Red or black hollow candlestick: indicates bullish sentiment, but not as strong as the green or white variant.

- Green or white filled candlestick: denotes bearish sentiment.

- Red or black filled candlestick: marks the strongest bearish sentiment.

By analyzing the closing price of the current candlestick in relation to the previous one, hollow candlesticks can deliver finer insights into the market's momentum. For instance, an emerging pattern of hollow candlesticks with elongated bodies and minor wicks implies robust buying pressure and a continuation of the uptrend. In contrast, a pattern of filled candlesticks of similar stature suggests significant selling pressure with a probable persistence of the downtrend.

Moreover, with their emphasis on consecutive closing prices, hollow candlesticks can provide traders with a more nuanced understanding of critical support and resistance levels. A hollow candlestick materializing subsequent to a series of filled candlesticks at a pivotal support level might signify that the market has established support, suggesting an upward price trajectory. Equally, if a filled candlestick follows a series of h

Hollow Candles vs. Traditional Japanese Candlesticks

Hollow candles, like traditional Japanese candlesticks, are a charting method used to represent price movements in financial markets. They consist of a "body" that shows the range between the open and close prices and "wicks" or "shadows" that indicate the high and low prices during the candle's timeframe. However, there is a fundamental difference in how they depict price movement, particularly the open and close prices.

### How to Read Hollow Candles:

1. **Hollow (White) Candle:** A hollow candle occurs when the closing price is higher than the opening price, indicating bullish price action. In a traditional candlestick chart, this would be represented by a white or unfilled candle.

2. **Filled (Colored) Candle:** A filled candle happens when the closing price is lower than the opening price, which signals bearish price action. In a traditional candlestick chart, this would be represented by a black or colored candle.

3. **Wicks/Shadows:** The thin lines above and below the bodies are the wicks. The top of the upper wick represents the high of the period, while the bottom of the lower wick represents the low of the period.

4. **Color:** Some hollow candle charts use colors to represent bullish or bearish sentiment despite the hollow or filled nature. A hollow green candle could mean a close higher than open (bullish), and a red filled candle could mean a close lower than open (bearish).

### Difference from Traditional Japanese Candlesticks:

Traditional Japanese candlesticks use color to denote price direction between the open and close. Typically, a white or green candlestick means the close was above the open (up day), and a black or red candlestick means the close was below the open (down day).

Hollow candle charts, by contrast, focus on highlighting whether the close is higher or lower than the previous close rather than just the open of the same period. This subtle difference emphasizes the change from the last close, which can provide additional insight into market sentiment.

### Advantages of Hollow Candles:

- **Emphasis on Closing Price:** They emphasize the importance of the closing price relative to the previous close, which can be critical as the close is often considered the most important price of the day by traders and analysts.

- **Trend Clarity:** Hollow candles can make it easier to identify the strength and continuation of trends. A series of hollow candles suggests sustained buying pressure, while a series of filled candles can indicate ongoing selling pressure.

### Limitations of Hollow Candles

Pros and Cons of Hollow Candles

Pros of Hollow Candles:

Enhanced Information: Hollow candles offer detailed insight into market performance by comparing the closing price of a period with the prior period's closing price, providing additional context beyond traditional candlestick patterns.

Clarity for Beginners: The straightforward visual cues presented by hollow candles make it easier for those new to chart analysis to interpret price actions and discern market behavior.

Trend and Signal Clarity: The distinctive appearance of hollow candles provides traders with explicit indications of trend reversals and critical levels of support and resistance, enabling more definitive decision-making.

Cons of Hollow Candles:

Niche Application: Hollow candles are less prevalent in the trading community compared to traditional candlesticks, and therefore, resources and expert guidance on their interpretation may be scarce.

Potential Confusion: The resemblance between hollow candles and conventional Japanese candlesticks can create confusion among traders accustomed to the latter, leading to incorrect analysis and decision-making.

Interpretation Variability: The subjective nature of chart analysis means that hollow candles, like any other technical analysis tool, can be open to different interpretations by various traders, leading to diverse and sometimes inconsistent trading approaches.

In conclusion, hollow candles present a visually intuitive method for tracking price movement and identifying market trends, but as with all trading tools, it is imperative to use them thoughtfully and in conjunction with a comprehensive analytical strategy.

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.