Doji Candlestick Pattern: A Step-by-Step Guide ( PDF )
The Doji candlestick is widely known as the Doji candle in the technical analysis discipline. Note that there are bearish and bullish Doji patterns. Also, the most famous types are the dragonfly Doji and the gravestone Doji. On the one hand, standard and long-legged Doji are traditional candle occurrences that reflect indecision but do not provide clear signals in coins markets. On the other hand, dragonfly and gravestone Doji are clearer candlestick patterns. Because they are trend reversal formation patterns indicating that a strong party is stepping into the forex market to push prices away from the tail in the direction of the body. Discover step-by-step about this unique forex candlestick and how to trade it once you identify a Doji pattern.
Doji Candle FAQ
What is a Doji candle pattern ?
The Doji is meaning an important Japanese candle on the candlestick chart. Once a Doji shapes, it divulges to you that the financial asset opened and closed at the same trading price. Consequently, this implies parity between bulls and bears. Besides, this suggests uncertainty among buyers and sellers. In other words, there is no one controlling the forex market when the Doji candlestick forms.
The Doji candle is composed of two perpendicular lines. First, the horizontal line specifies the body of the candle which can vary in height, while not in width. Second, the vertical line specifies the wick of the candlestick which may vary in length.
What does it tell forex traders ?
The Doji candlestick tells us that neither buyers nor sellers are gaining control over the FX market. In other words, the Doji candle indicates a state of indecision or neutrality between forex traders. On the one hand, a Doji pattern can reveal an upcoming price reversal. However, this is not always the case. Because it may alert that bulls or bears are accumulating for the trend continuation.
How is the Doji candlestick formed ?
The Doji candlestick forms when the currency pair opens and closes at almost the same price inside the timeframe of the forex chart on which the Doji candlestick occurs. To explain, this implies that the exchange has not yet decided in which path the price would continue. Despite the price has oscillated between open and close prices, it closed at the same open price. A Doji candlestick can form in two ways. Either, bulls attempt to drive the stock market up while sellers reject this by trying to push it lower again. Or, bears try to push the currency down while buyers refuse the situation by attempting to drive it higher again. To clarify, upside and downside moves between the higher and lower prices create the wick(s) of Doji candles. However, the body is almost negligible as the crypto market opens and closes at nearly the same level.
Let us consider the share price of Tesla. The stock opened at $1008.45 in an H3 timeframe. Then, the buying and selling activity drove the share price to hit its lowest of $1003.75 and highest of $1010.20 before closing at $1008.40. This creates a common Doji candlestick pattern example, as depicted in the downer chart.
Is a Doji Candlestick bullish or bearish ?
A Doji candle often indicates bullish or bearish reverse signals after big moves. In fact, it shows that the prior move is losing its strength. The following chart illustrates how the currency pair switched its general direction after the appearance of the Doji candle. First, the price was trending up, which means that bulls were dominating. However, the Doji candlestick formation suggests that they were unable to maintain this state of dominance to keep prices higher. Here sellers were pushing the currency back to the open price. Then, the move reversed, and the price begin trending down following the bearish Doji candlestick occurrence.
In short, the Doji candlestick is bullish at the end of a significant downtrend. Alternatively, bearish at the end of an uptrend. So, it serves as an entry signal after big moves. Moreover, we will discover whether the Doji is bullish or bearish based on its type in the next section of the review.
What are the different types Doji candlesticks ?
There are five types of Doji candlesticks:
- Standard Doji
- Four price Doji
- Long-legged Doji
- Dragonfly Doji
- Gravestone Doji
The picture below reveals each type of Doji candlestick pattern.
Let us explain the basic types of these Doji patterns:
- Standard Doji meaning
The Standard Doji is the most basic type of Dojis. It looks like a single candlestick on the price chart. Besides, it does not suggest signals on its own. To explain, observing the prior and posterior price activity to the Doji formation would be helpful. Traders perceive the standard Doji type as a neutral pattern that arises in stock and currency markets.
- Four price Doji meaning
The Four Price Doji is plotted as a horizontal line with no wicks. That is to say, with no vertical line. To explain, this 4-price Doji type symbolizes a great state of indecision since the open, close, high, and low prices of the candlestick are equal. In other words, all of the four prices of the candle are represented by a simple horizontal constant price. Thus, the 4 Price Doji is a special pattern that indicates an incredibly quiet exchange.
Long-legged Doji meaning
The long-legged Doji pattern is an extension of the previously discussed standard one. The only difference between the standard and the long-legged Doji is that the vertical line of the second one has greater extensions beneath and beyond the horizontal line. Consequently, during a specific timeframe, the price action pushed up and down considerably. Yet, the candle closed at almost the same price level where it has opened. Hence, this displays intense indecision between bulls and bears.
Now, we will move to a detailed explanation of the two other famous Doji patterns that all FX traders should master in forex trading.
Dragonfly Doji meaning
A Dragonfly Doji is often a bullish candlestick pattern. To explain, a dragonfly candle is formed if its open, close, and high prices are almost the same. Also, it has a long lower shadow indicating that buyers are resisting price depreciation and attempting to push the exchange up.
The following drawing displays us perfect dragonfly Doji example. Note that the long lower tail means that supply and demand forces are approaching a balanced state and that the trend direction may reverse soon.
Is Dragonfly Doji bullish or bearish pattern ?
You can visually notice that the dragonfly Doji pattern created a bullish reversal signal on the chart. In other words, demand and support locate near this formation. Consequently, when a dragonfly Doji occurs at the bottom of a downtrend, this is perceived as a bullish reversal signal. In short, a dragonfly Doji pattern with a long lower wick conducts us that a strong buying pressure overwhelms the area. Also, this means that the price has probably tested a previous supporting area that experienced rejection from it.
What is the opposite of a Dragonfly Doji Candlestick ?
The opposite counterparty of the Dragonfly Doji is the Gravestone pattern. In fact, it shapes the opposite with an insignificant lower body and an upper long shadow. Let us discuss the Gravestone structure in detail.
Gravestone Doji meaning
A Gravestone Doji is usually a bearish pattern. In fact, it stands for the bearish counterparty of the dragonfly Doji version. To clarify, this candle forms if its open, close, and low prices are nearly the same. So what distinguishes a Gravestone Doji from a dragonfly Doji is only the long upper wick. Moreover, the later long downer shadow suggests that sellers are resisting price appreciation and trying to drive the stock market down.
The following illustration depicts us perfect gravestone Doji example. While buyers were capable to push up the price of the candle above its opening. Later, sellers dominated the crypto market by pushing back the price lower. Thus, a reversal would occur momentarily.
Is a Gravestone Doji bearish or bullish pattern ?
The next chart contains a gravestone Doji after a strong bullish price activity. Then, the pattern created a bearish reversal signal. That is to say, supply and resistance locate at its appearance. Therefore, once a gravestone Doji appears at the top of an uptrend, that is interpreted as a bearish reversal signal. In conclusion, a gravestone Doji pattern with a long upper tail conducts us that bulls are no longer controlling the exchange. Moreover, it means that the price movement has likely tested a prior resisting area that experimented with rejection from it.
How to trade with a Doji candlestick ?
Investors may trade various Doji candlestick formations in numerous ways. Below we will analyze multiple trading Doji candlestick strategies.
Trading with neutral Doji candlestick
A neutral Doji is a candle with almost an invisible body that is positioned in its middle. Besides, the upper and downer wicks have nearly a similar length. That neutral pattern arises next to the symmetry between bullish and bearish sentiments. Generally, a neutral Doji is perceived as a trend continuation candle pattern. However, reversals could sometimes occur next to it. To explain, if a strong bullish candlestick precedes the neural Doji, this indicates a buying signal and vice versa. Moreover, when a bullish candle arises above the high of the Doji and holds a higher low than that of the Doji candlestick, this implies a bullish continuation signal and vice versa.
Trading with Doji star pattern
The Doji star pattern appears either at the top of an existing uptrend or at the bottom of a prevailing downtrend. This Doji candlestick pattern suggests that neither bulls nor bears are overwhelming and that the movement might probably reverse. Here traders have better look for additional reinforcing signals that the trend is reversing before initiating any position. The downer CADCHF chart exploits the RSIndex as a confirming signal along with a Doji star pattern. To clarify, this indicates that the currency pair is in an overbought condition. Thus, it adds confirmation to the bearish reversal occurrence.
Double Doji trading strategy
One single Doji reveals a state of indecision. Yet, two successive Dojis one after another express a strong forward breakout. Thus we will discover the double Doji strategy in this paragraph. Globally, the double Doji strategy aims to benefit from the substantial directional movement that develops after prolonged indecision circumstances. Immediately after the double Doji formation, chartists may wait for the next price move. To explain, the process resides in pursuing this price to move up or down in order to trade in the breakout direction. The entry price can be the close price of the candlestick that follows the double Doji occurrence. Also, the stop loss may be set above the highs of the two Dojis in a bearish case. Alternatively, below the lows of the two Dojis in a bullish situation. And the profitability target can be placed near the most recent supporting or resisting grades.
To conclude, the Doji candlestick pattern aids chartists to identify indecision moments among buyers and sellers. Thus, this Doji candle highlights trading opportunities in the forex, stock, and crypto market. However, it is not recommended to base trading decisions on this candle pattern in isolation.