The lion’s share of this liquid and lucrative market, trading $6.6 trillion in dollar swaps daily, is the foreign exchange (forex) market. Forex traders’ jobs are very crucial since these volume trading days are huge and need much technical analysis and the use of indicators to find profitable trading opportunities. Forex trading is one of the most popular technical analyses used in forex trading, and one of the most popular types of technical analysis is Japanese candlestick charts. Before entering modern financial markets, candlestick charts have been used for over 400 years to track price movement and investor sentiment in rice trading.
Hollow candlesticks are among the many candlestick patterns that are popular among forex traders these days. Hollow candlesticks are unique and have a predictive nature, which makes them good for the fast-paced forex market. In this article, we will look into hollow candlesticks, what they mean, and how dash forex traders can use them alongside other technical indicators to make profitable decisions.
The Basics of Candlestick Charts
Before exploring hollow candlestick charts, it is important to understand what candlestick charts are and what their components signify.
A candlestick chart is a chart that plots a specific period of the price action of a security. Unlike line or bar charts, candlesticks also provide information on the opening, closing, high, and low prices during that timeframe.
Each candlestick has three basic features:
- The Body. The thick middle part of the candlestick shows the range between the open and close prices. If the body is filled, it means the close was lower than the open (bearish candle). A hollow or empty body signifies that the close was higher than the open (bullish candle).
- The Wicks. The high and low price points during that period are represented by the thin lines above and below the body. Prices were shown to have fluctuated outside of the open and close.
- The Color. A candlestick can be red or green/white. Green/white candlesticks close higher than the open, while red candlesticks close lower than the open.
By providing a visual depiction of prices over time, candlestick charts help traders spot trends, reversals, support, and resistance levels faster. The unique components give a feel of the market sentiment and momentum as well.
Understanding Hollow Candlesticks
As the name suggests, hollow candlesticks are candlesticks with an empty body, where the close is higher than the open. They are visually represented by rectangles or squares, with upper and lower shadows protruding out from the body.
Here are some key points on hollow candlesticks:
- Hollow candlesticks signify bullish momentum in the market. The buying pressure during that period pushes the close higher than the open.
- They indicate that buyers were dominant during that trading session and could continue being aggressive. This makes traders consider long positions.
- The color of hollow bodies is always green or white, reiterating that the closes were higher than the opens.
- The upper and lower wicks show that prices traded above and below the session’s opening/closing range at some point. But buyers managed to recover and closed the session near the highs.
- The longer the hollow body, the stronger the buying momentum. A long hollow body signifies that the open was much below the close, and buyers could sustain the uptrend.
- A bullish continuation pattern is formed by consecutive hollow bodies, while a hollow body after filled bodies indicates the potential reversal of bearish to bullish sentiment.
We have now understood the basics of hollow candlesticks and what they indicate, so it is time to combine them with other tools of technical analysis.
Using Hollow Candlesticks with Other Technical Indicators
While trading just based on hollow candlesticks can be profitable, using them in conjunction with indicators like moving averages, volume, support & resistance can improve trade accuracy. Here are some ways to use hollow candlesticks with other technical analysis tools:
Hollow Candlesticks with Moving Averages
Moving averages are one of the most popular trading indicators used by forex traders. They smooth out price action and help identify support/resistance levels and trend direction. Combining hollow candlesticks with moving averages can improve trading efficiency.
In the case of an example, if prices are currently trading below the 200-day moving average, which means the market is in a downtrend, the appearance of a large hollow candlestick may be taken as a sign of trend reversal. Traders may interpret it as increased buying momentum and an opportunity to enter long positions after confirmation from other indicators.
Using Volume with Hollow Candlesticks
The volume shows how much of a currency is traded in a candlestick’s time frame. Further information on market dynamics can be obtained by analyzing volume with candlestick patterns.
Empty bodies have a stronger bullish implication when the trading volume is abnormally large for hollow candlesticks. It means that there are heavy volumes which indicate increased buyer interest and possibly a new uptrend. However, the uptrend may not last long in hollow bodies with low volumes. Therefore, traders should be careful before they start the bullish positions.
Identifying Support and Resistance with Hollow Candlesticks
In time, some price levels become barriers that stop prices from going up or down further. These become support and resistance levels, respectively. Hollow candlesticks help identify such areas accurately.
Let’s take an example: suppose the security has failed to break the 25 price in the past month, and it begins forming hollow candlesticks near it; traders could be waiting for the buying momentum to test the resistance. A close above 25 on much higher volumes could be the breakthrough that opens the road for a resumption of the uptrend.
Similarly, buyers defend the price floor by placing hollow candlesticks near existing support levels. Traders expecting a bounce off the support may consider their emergence after a prolonged downtrend as a buying opportunity. When the hollow candlestick analysis is integrated with support and resistance, the odds of entering profitable trades are increased.
Hollow Candlesticks with Chart Patterns
Hollow candlesticks assume even higher relevance when they occur within the framework of chart patterns like triangles, flags, or wedges. These patterns depict market consolidation before a major breakout or breakdown.
Suppose on an ascending triangle, after a series of smaller filled candles, there is a long hollow candlestick, which indicates growing momentum. It may be interpreted as a breakout signal by traders, and they may take long positions.
Similarly, bull flags and wedges with hollow candlesticks popping up within them indicate a continuation of the current uptrend once the pattern is completed. By combining chart pattern analysis with hollow candlesticks, it is possible to spot profitable breakout opportunities.
The predictive nature of hollow candlesticks improves further with additional confirmation from other indicators. Just relying on hollow candlesticks without other confluence factors can lead to false signals and failed trades, though. We will now see some key trading strategies using hollow candlesticks.
Trading Strategies with Hollow Candlesticks
Here are two effective trading strategies using hollow candlesticks:
Hollow Candle Breakout Strategy
This strategy relies on hollow candlesticks signaling breakouts from ranges or chart patterns. Here are the steps to implement this strategy:
- Look for the market between support and resistance levels, consolidate, or make a triangle/flag/wedge continuation pattern.
- Look for a large hollow candlestick to appear above average volumes. This signifies growing momentum.
- If you place long orders just above the high of the hollow candlestick, you can take advantage of the breakout.
- Trade the remaining position with a moving average and book partial profits once prices move equal to the recent range.
Hollow candles are used to signal a breakout of consolidation zones or at the end of chart patterns. These setups have a good risk/reward ratio and can be traded.
Bullish Engulfing with Hollow Candlestick
This candlestick pattern reversal strategy has two steps:
- Identify a strong downtrend and wait for a bullish engulfing pattern to emerge at support. This occurs when a green/white hollow body candlestick engulfs the previous red-filled candlestick.
- Buy once the hollow candlestick in the bullish engulfing pattern closes near its high with above-average volumes. Place a stop-loss below support.
Since the filled body of the preceding candlestick gets engulfed, it signals a reversal of the downtrend. The hollow candle provides additional confirmation of resuming bullish momentum.
Conclusion
Hollow candlesticks are powerful indicators of emerging uptrends in forex trading. They depict buyer dominance during that trading session and prospects of further upside. But it is not enough to rely on candlestick patterns alone. Hollow candlesticks in conjunction with moving averages, volume, and support & resistance levels improve the trading accuracy. By trading with a hollow candle breakout and a bullish engulfing pattern, let’s say we can make some profit. Overall, hollow candlesticks serve as handy visual tools to confirm entry and exit timing when integrated into a robust trading system.
