A Doji candlestick Pattern can represent indecision in the market. This means neither the bull nor the bear is in control. In Japanese (the origin of candlestick patterns were from Japan), the word Doji means mistake. A doji candlestick is formed when the market opens and bullish traders push prices up while bearish traders reject the higher price and push it back down. It could also be that bearish traders try to push prices as low as possible, and bulls fight back and get the price back up.
What is the Doji Candlestick Pattern?
The Doji Candlestick looks like a cross or a plus sign. The upper and lower wicks are of equal length. It forms when a forex pair or a stock opens and closes at the same level, leaving a small cross-shaped body.
There are times when sellers and buyers are hesitant to make their move. This is what Doji tells us. This can be viewed as a sign of reversal. It can also mean buyers and sellers are gaining momentum for a trend continuation.
Every candlestick pattern is based on high, low, open, close, and Doji is no different. These are the set of data points that help to define the shape of a candlestick.
The Doji Candlestick Pattern has three variations; Gravestone, Long-legged, and Dragonfly. While the main Doji represents indecision, other Dojis can tell a different story depending on the open/close price.
Below, you can see all types of Dojis.
The appearance of a perfect Doji is a rarity. So, trades look for candlesticks that resemble Dojis.
How to use the Doji Candlestick Pattern?
There are various ways to trade a Doji Candlestick Pattern. However, to determine the strength of a trend, traders can use momentum indicators to confirm what the Doji pattern suggests.
For example, if a Doji appears in a downtrend, there is a chance of a trend reversal. By using the Stochastic Oscillator, you can look for overbought condition. Conversely, if a Doji is present in an uptrend, you can see the oversold condition. But, Doji Candlestick Pattern can show both overbought and oversold situations.
Whilst a doji can indicate that a reversal of price direction is in progress, it can also be a continuation pattern where prices hover at their current value. The Gravestone doji and the Dragonfly doji are stronger indicators of price reversal than a standard doji.
This brings us to Doji’s bullish and bearish pattern.
Bullish Doji Candlestick Pattern
A bullish Doji appears when the market is in a downtrend, signaling a possible trend reversal. It is present at the bottom. In the case of a bullish Doji, we may look to go long.
Bearish Doji Candlestick Pattern
A bearish Doji appears when the market is in an uptrend. The appearance of the Doji can mean the trend is going to reverse from the bullish to bearish. In this situation, we may look to go short.
One of the popular trading approaches is to look for Dojis near support and resistance levels. When a Doji appears near the support level, it can continue to move in an uptrend. Whereas, if a Doji is present near a resistance level, it can be an indication of a downtrend.
Sometimes, two Dojis can appear at the same time. In this situation, we could wait for the direction of the market and then trade accordingly.
Doji Candlestick Pattern trading strategy
Doji Candlestick Patterns can be helpful in reversal trading strategies and can be used for intraday trading, long term trading and on any trading instrument.
A single Doji is usually a good indication of indecision however, two Dojis (one after the other), presents an even greater indication that often results in a strong breakout. The Double Doji strategy looks to take advantage of the strong directional move that unfolds after the period of indecision.
Doji Candlestick Pattern buy strategy
- The Doji must appear in a downtrend.
- Wait for the price bar to go bullish.
- Set a stop-loss near recent swing low.
- Exit the trade at the highs.
Doji Candlestick Pattern sell strategy
- The Doji must appear in an uptrend.
- Wait for the price bar to go bearish.
- Place a stop-loss near recent swing-high.
- Exit the trade at the lows.
Doji Candlestick Pattern Conclusion
A Doji is a candlestick pattern that looks like a cross as the opening price and the closing prices are equal or almost the same. When looked at in isolation, a Doji indicates that neither the buyers nor sellers are gaining – it’s a sign of indecision.
Although the Doji represents neutrality in the market, it often signifies a trend reversal. The different types of Dojis can present bullish and bearish biases in the market. You can use it in various trading strategies and indicators, including momentum oscillators.
The Doji Candlestick Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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