What Is The Doji Candlestick Pattern & How To Trade With It

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.

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.

Doji Candlestick Pattern on a chart
Doji Candlestick Pattern on a chart

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.

Doji Candlestick Pattern Types
Doji Candlestick Pattern Types

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.

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.

Bullish Doji Candlestick Pattern
Bullish Doji Candlestick Pattern

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.

Bearish Doji Candlestick Pattern
Bearish Doji Candlestick Pattern

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.

As mentioned before, you can combine Doji with momentum indicators like stochastic or moving averages to help try and determine the direction of the trend.

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 buy setup
Doji Candlestick Pattern buy setup

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 sell setup
Doji Candlestick Pattern sell setup

Doji Candlestick Pattern Conclusion

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.

I would prefer to use the majority of candlestick patterns such as the Doji Candlestick Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.

The Doji Candlestick Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Doji Candlestick Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Doji Candlestick Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!