Discussion Topic: Doji Candlestick Pattern
In this article, we will discuss the doji candlestick pattern. In this lesson, you will learn how to identify a doji candlestick pattern? What they convey about the market trend? When and why doji candle is useful in trading?
What is a Doji Candlestick Pattern?
The doji candlestick pattern is formed by a single candle. In the Japanese language, the word "Doji" means “The same event” or “no change”. Deriving from that, a perfect doji means a candle with the same open and close price. In a practical scenario, we also identify candles with a very small body (appearing as a thin line) as a doji. The shadows of a doji candle can be of any length.
Doji’s provide important information about the market sentiments based on the types and where it is occurring. Usually, doji candles indicate indecision or a fight for positioning between buyers and sellers.
Prices may move above and below the open price during the session but simply closed at or very near the open price. The conclusion is that neither the buyers nor the sellers were able to gain control and the result becomes a draw.
Theoretically, there should not be any color of the candle. Hence, you must not take into consideration the color of the candle while doing technical analysis, in case it has a very tiny body.
How to Identify a Doji Candle? What are the Types of Doji?
It’s a single candlestick pattern. In this pattern, the candle will only have shadows and will not have any real body (or very tiny body). The Open price of the candle will be the same as close price.
[Note: Do not get confused with Spinning Top Pattern, which is very similar]
So, the identification mark for an ideal spinning top will be:
- Very thin or NO actual body.
- Open Price = Close Price
- Shadows can be of any length.
- The color of the candle, in case it has, does not matter.
Among various kinds that can exist, only five types of doji candlesticks are the most popular. They are:
- Doji Star,
- Long-legged Doji,
- Dragonfly Doji,
- Gravestone Doji, and
- Four Price Doji.
Images of these patterns are shown below:
How to Trade the Doji Candlestick Pattern?
Depending on the type and the position a doji appears, the trading style will be different.
But in all the cases, you should wait for another confirmation candle or pattern before entering into a trade.
How to Trade with Doji Star?
A doji star signifies indecision in the market but also denotes very low activity. The doji star will have the same open and close price. It will also have small shadows on both sides.
Usually, it is very useful in a 1-day candle, especially if there is any gap-up or gap-down happens before that. The explanation of this is that when the market opens the bulls and bears both were in a lazy mode. They have not tried much to drag the price on either side. In the end, the price closes at the starting price.
We don’t recommend to trade only by observing this pattern. But, it generally indicates an early sign of trend reversal.
How to Trade with Long-Legged Doji?
A long-legged doji signifies indecision in the market but also denotes very high activity. The long-legged doji will have the same open and close price. It will also have very large shadows on both sides.
Usually, it is very useful in a 1-day candle, especially if it appears in a very strong trend. In this condition, it generally indicates that the buyers and sellers tried hard to put the price in their direction but both of them failed. Hence, in the end, the price closes at the opening price.
We don’t recommend to trade only by observing this pattern. But, it generally gives an early sign of trend reversal.
How to Trade with Dragonfly Doji?
It looks like the English “T” letter. The open, high, and close prices are the same. And it will have a very long down shadow.
It works best if appears after a long downtrend. The explanation of this is that when the market opens the bears drag the price down to very low, but eventually the bulls fight back and drag the price up to the starting position. The longer the shadow the powerful this pattern is.
To trade with this pattern, you must first look for this pattern after a downtrend. Then to confirm the trend reversal, wait for a candle to firmly close above the dragonfly doji. Now you can prepare to open a long position if the high of this candle breaks with a stop loss of the low price of the dragonfly doji candle.
How to Trade with Gravestone Doji?
It looks like the inverted “T” letter. The open, low, and close prices are the same. And it will have a very long upper shadow.
It works best if appears after a long uptrend. The explanation of this is that when the market opens the bulls drag the price up to very high, but eventually the bears fight back and drags the price down to the opening position. The longer the shadow the powerful this pattern is.
To trade with this pattern, you must first look for this pattern after an uptrend. Then to confirm the trend reversal, wait for a candle to decisively close below the gravestone doji. Now you can prepare to open a short position if the low of this candle breaks with a stop loss of the high price of the gravestone doji candle.
How to Trade with Four Price Doji?
This is one of the most avoided candlestick pattern types. This means the opening, high, low, and closing all prices are same in this session. This indicates there is very little to NO activity of buyers and sellers for this session.
This generally occurs in such stocks which are very unpopular or in which traders are not interested to do trades. Hence, our advice is that you should avoid trading on such stocks (or instruments) in which this pattern occurs frequently.
We hope that you have enjoyed the above article explaining the Doji Candlestick Pattern and how to trade with it. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about the above topic, we will be happy to help you.