How to trade the doji candlestick pattern

Spinning tops have more separation between the opening and closing prices, and they typically indicate a trend continuation rather than a reversal. A doji (dо̄ji) is a name for a trading session in which a security has open and close levels that are virtually equal, as represented by a candle shape on a chart. Based on this shape, technical analysts attempt to make assumptions about price behavior. Doji candlesticks can look like a cross, inverted cross, or plus sign. A doji is important in markets because they signal indecision and a possible trend change when combined with other patterns and other technical indicators.

The doji pattern is as popular and frequently used as ABC pattern, inverse head and shoulders pattern, tweezer top pattern, shark pattern, pin bar candlestick, etc. You can try out trading doji risk free with a City Index demo account. It gives you virtual funds to hunt for doji across 1000s of live markets, including forex, indices, shares and more. In the above Markel example, the doji candle occurs on the 5th triggering an entry on the 8th with a profitable exit on the 9th, depending upon your risk-reward levels.

This article will define a Doji, describe its traits, and discuss how traders can use it to make wise trading decisions. The Doji candlestick pattern relates to the candlestick method of technical analysis. Either a bullish or a bearish engulfing candlestick can create a Doji.

The long-legged Doji – long-legged Doji

When using Doji, it is important to consider the context in which it occurs, the time frame being analyzed, and the market conditions. The main advantage of doji candlestick patterns comes from the fact that they show periods of indecision in the market. This allows traders to take positions accordingly and reap the potential reward in profits if the trade goes as expected. The dragonfly doji candlestick pattern is also similar to the common doji pattern. The only difference is that the opening and closing price ends up near the high of the day. They mostly occur over one period and can therefore only indicate what the price may do in the short-term, rather than helping to signal long-term changes in trends.

The market saw strong buying sentiment in the period, but by the end of the period it had been cancelled out. This can be a sign that an uptrend is coming to an end, or perhaps that a downtrend is set to continue. In general, the neutral doji and the spinning top indicate uncertainty in the market, which is confirmed by their wicks (shadows). In both cases, the appearance of these candles can mean a reversal, but one should wait for additional signals as a confirmation. Use a Doji in conjunction with other technical indicators, such as support and resistance levels, to make more informed trading decisions.

Candlestick Analysis – A Beginners summary

If you notice, the market is above the 50-period moving average and it tends to bounce off it repeatedly. As a swing trader, you can look to take profit at the nearest swing high or at resistance area. Notice that the price came into the area of support, rejection of lower prices. Because if you try to do that, you’re going to suffer in trading because there are hundreds and hundreds of patterns.

Although rare, a doji candlestick generally signals a trend reversal indication for analysts, although it can also signal indecision about future prices. Broadly, candlestick charts can reveal information about market trends, sentiment, momentum, and volatility. The patterns that form in the candlestick charts are signals of such market actions and reactions. Due to their tendency to blend into the background and their similar short stature, doji and hammer candles may appear similar.

What does Doji indicate?

There is a pullback to the upside, followed by a gravestone that marks the end of the pullback higher. The price moves lower after the gravestone doji, confirming that the bears have taken over again. In this case, the dragonfly doji occurs after a small pullback in an overall uptrend. As the price is starting to move back up, the dragonfly doji on top of recent candles shows that the sellers are decreasing and the bulls are taking over again.

In the end, a transitional candlestick serves as the primary indicator of the market’s bulls’ and bears’ equality and indecision. Candlestick patterns may consist of one or more candlesticks and provide information to traders about trend continuation, reversals, and other price action. There are several types of candlestick patterns that traders use. Some of these patterns are the evening star, morning star, doji, hammer, engulfing, and piercing lines among others. Candlestick charts can be used to discern quite a bit of information about market trends, sentiment, momentum, and volatility. A long-legged doji forms, much like the common doji, with an open price and close price roughly the same or equal.

Fundamental Analysis VS Technical Analysis In Crypto

The Doji candlestick pattern may not provide the strongest buy or sell signals in technical analysis, and should likely be used alongside other metrics. Nevertheless, it is a useful market signal to consider when gauging the degree of indecisiveness between buyers and sellers. Doji might be simple candlestick patterns, but they can unlock some powerful strategies. Using the popular technical indicator, the doji acts as a confirmation candle and creates a higher probability of a trend reversal.

• As you can see, the price starts to move lower after the Doji is made.
• Candlestick charts can be used to discern quite a bit of information about market trends, sentiment, momentum, and volatility.
• If we spot a doji on one of the Fibonacci levels, then it’s a stronger sign that the countertrend may be over.
• Doji has a lot of variations, for example, gravestone, long-legged doji, dragonfly, doji following a long bullish candlestick, etc., which could be confusing.
• On the other hand, for a bearish Doji candle, placing a short-sell order below the low and a stop-loss above the high can be a good strategy.

You want to collect as much evidence as possible for confirmation. In technical analysis, a Doji is a type of candlestick pattern that can be used to predict future price movements. The Doji candlestick forms when the opening and closing price of the asset are roughly equal, resulting in a small body with long upper and lower shadows.

Pros and Cons of the Doji Candlestick Patterns

A doji Japanese candlestick is a formation that appears in the candlestick chart when the price movement has stopped, and there is market uncertainty. Once you spot a doji, it’s good to look for confirmation before acting on it. Following a dragonfly doji, for example, look for bullish price action and strong trading volume to confirm a bullish reversal. You should also check that technical types of doji candlestick indicators like MACD and RSI point to a bullish reversal before trading based solely on a dragonfly doji. Estimating the potential reward of a doji-informed trade also can be difficult because candlestick patterns don’t typically provide price targets. Other techniques, such as other candlestick patterns, indicators, or strategies, are required to exit the trade, when and if profitable.

The next thing in the market is that it rallied higher back into the swing high and into the area of resistance. And the market closes slightly higher which is a variation of the Dragonfly Doji. And I will share with you two types of market conditions that you can use to trade the Dragonfly Doji. Don’t make this mistake of just going short just because you see a Doji in an uptrend.

How a doji pattern is useful to traders

Steve Nison, is one of the best-known writers on candlestick patterns. To put it simply, a Doji candlestick pattern is when the candle has the same open and closing price. Traders should carefully monitor the candlestick’s closing price when identifying a potential long-legged Doji.

This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day.