The Doji candlestick chart pattern is among the formations that are considered unique and rare. In this blog, we are going to discuss all that a trader should know about Doji candlesticks.
What is a Doji Candlestick?
Commonly known as Doji, It is a candlestick pattern that shows a high price movement but the opening price and closing price are almost the same.
The Doji candlestick chart pattern usually looks like a pair of vertical and horizontal lines intersecting each other. The vertical line is called the wick and the horizontal line is called the body.
Must-read: Candlestick patterns every trader should know
How is a Doji Candlestick Pattern Formed?
A Doji candlestick chart pattern is formed due to indecision in the market where neither the bulls nor bears can push prices.
Suppose the market opens, and the bullish traders push prices higher but the bearish traders reject the price and push it downwards or vice versa. This causes compression and the opening and closing price remain almost the same.
In short, a Doji candlestick forms when both the buyers and sellers continuously try to change the price direction with equal force, but eventually they both fail. It leads to upward and downward movements of the price.
However, when the candle closes, there is hardly any difference between the open and close price.
What Does a Doji Indicate?
If we just look at the Doji candlestick, we can understand that there is hardly any difference between the opening and closing prices. This also means that both buyers and sellers have failed to create significant price movements.
However, when we look at the Doji candlestick along with other candlestick patterns in the chart, the Doji pattern indicates the chances of an upcoming price reversal.
Though it is not entirely reliable because a Doji candlestick pattern also indicates that buyers and sellers are gaining momentum. This might result in the continuation of an ongoing trend.
In simple words, Doji tells traders that there are chances of a possible reversal or continuation trend. But you must confirm it using other technical indicators.
Here is a list: Technical Analysis Indicators
5 Types of Doji Patterns You Should Be Aware Of
There are multiple types of Doji candles that can appear on a candlestick chart. Based on the position of Doji candles, each candlestick pattern offers a different insight to the trader.
Let us uncover all these Doji patterns and the information they offer:
1. Neutral Doji Candlestick
The neutral Doji (namely the common Doji) is the most commonly occurring Doji pattern. The common Doji looks more like a plus “+” sign. Neutral patterns indicate that buying and selling are almost the same and the future direction of the trend is uncertain.
2. Dragonfly Doji
A Dragonfly Doji candlestick pattern looks like a “T”. It is created when the opening price, high, and closing prices of the candle are the same but the low price is way below them. A Dragonfly Doji indicates the strength of the bull market.
3. Gravestone Doji
A Gravestone Doji candle looks like an inverted ‘T’ with a long upper shadow. It is the exact opposite of the Dragonfly Doji in every sense.
The Gravestone Doji candle shows that the buyers were strong initially but the bears took over and caused the price decline indicating the strength of the bear market.
Bearish Gravestone Doji: A bearish Gravestone Doji is quite easy to spot near market tops. It causes the end of a pullback to confirm that the bears have taken over again.
4. Long Legged Doji
The Long-Legged Doji looks more like a Christian cross that could even appear as an inverted cross in the chart patterns. Long Legged Doji shows that there were extreme highs and/or lows creating long wicks in the candlestick pattern.
It means that even though there were strong moves both up and down, neither buyers nor sellers could make any real progress.
Therefore, the open and close prices remained the same which led to the formation of Long-Legged Doji.
5. Star Doji
There are two types of Star Doji candlestick patterns and they appear at the end of either a downtrend or an uptrend. Both these Doji formations signal a different direction of the trend.
Many technical analysts consider the star Doji as a confirmation candle.
Bullish Doji Star: A Bullish Doji Star acts as a useful tool for technical analysis as it often causes trend reversal, or to be more correct, bullish reversal.
Bearish Doji Star: A Bearish Doji Star also causes price reversal, commonly known as the bearish reversal.
Example: How to Trade with Doji?
As u can see on the RIL chart, the previous trend was an uptrend. A Doji was spotted which resulted in a bearish trend reversal. But it’s important to know that, Doji doesn’t mean reversal, it strictly points out the indecision of the market.
Here we have used Investing.com as charting software.
But there are more: Softwares for technical analysis
Questions to Ask When You Spot a Doji Pattern
Here is a list of questions that you need to ask when you spot a Doji Candlestick Pattern:
⚡What is happening on the chart before the Doji forms? What is the current trend?
⚡Does the overall price moves higher in an uptrend?
⚡Does the overall price moves lower in an uptrend (also called a pullback)?
⚡Is there a continuation pattern or a pullback in price within an overall downtrend?
⚡Does the price moves sideways or in a triangle pattern?
⚡Is the Doji pattern near support or resistance?
When you find the answer to these questions, you will be able to form better trading strategies and identify price reversals and pattern signals.
Moreover, instead of losing money rapidly, you will be able to minimize risks for your trades.
Here is an amazing tutorial to learn from:
Difference Between a Doji and a Spinning Top
When we talk about the structure of the candle, a spinning top has a comparatively bigger body than Doji.
Moreover, be it either a doji or a spinning top, the implications are also quite different.
Limitations of a Doji Candlestick Pattern
It is at this point that we would like to share the limitations of a Doji candlestick pattern so you don’t make any mistakes while you practice trading:
Usually, Doji candlestick charts are quite confusing. It is better that you do not rely on them entirely and instead consider several other aspects before moving in for a trade.
However, using Momentum indicators could give you a clear perspective to determine the strength of a trend.
For example:
- You can use the stochastic oscillator to test the bullish bias
- Use derivatives such as CFDs or spread bets to trade rising and declining prices of any financial instrument
Depending on your findings, you can open a long or short position.
The formation of a Doji is quite rare and therefore you cannot rely on it as a tool to spot reversals. Additionally, even if it is formed, there is no certainty that the price will move in the expected direction.
It is not easy to gauge the potential rewards of the Doji candlestick. Moreover, it is important to use other indicators before making any trading decisions.
Conclusion
Even though the entire candle’s range of a Doji candlestick indicates a lot of probable events, it is better to consider other candlestick patterns and use indicators. After all, it is hard-earned money.
For any questions and queries related to the Doji candlestick pattern or the stock market, feel free to reach out to us.
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