A Doji candlestick has the ability to indicate markets’ inability to take decisions and the possible changes in a particular direction. Doji candlesticks are famous and extensively accepted by traders, just because they are obvious candles to point out and it’s working serves outstanding information for planting stops.
What is a Doji candle?
Doji candlestick pattern or Doji candle represents reversal pattern candle where open price level and close price level have the same value or are approximately equal for the given time period. Usually, the doji candle indicates a possible change in the trend, trend reversal.
Standard Doji is an alone candlestick, which does not add up too much itself. To realize the meaning of this candlestick, dealers notice the previous price activity adding up to the Doji.
The deals depended on Doji candlestick patterns should be taken into account. In this case, a Standard Doji moving upward may show to form a bit of preservation of the current upward flow.
Formation of Dojis occurs when a currency pair opens and closes on a nearly similar stage in the time-lapse of the chart on which the Doji appears. Despite the fluctuation in rates among opening and closing of the candle, the truth is that the opening and closure occur at nearly similar rates, which is when the market cannot decide whether to take the duo upward or downward.
The deals diverted to longer-term trends are the ones with higher chances. When a Doji appears at the base of a retrievement in an upper trend, or the elite of a retrievement in a downward trend, then the chances to deal with Doji are bigger. In a matter of an upward trend, the spot will go beneath the bottom wick of the Doji, and in a downward trend, the spot will go beyond the top of the wick.
It becomes prominent in a market that is neither dominated by the bulls nor by the bears. However, there are five variations of the Doji candlestick and not each of them highlights indecision in the market.
Since each pattern indicates a different type of market, every trader needs to understand how these candles are formed and how they can predict prices in the future in the Forex market.
Through this article, you will learn all about the Doji candlestick, including the five different Doji patterns and their uses in forex trading. We will throw some light on some of the top trading strategies using the Doji candlestick pattern.
Double Doji Pattern
The double Doji pattern consists of two Doji candles one after the other and represents a strong reversal pattern. The double Doji pattern is rare and usually has stronger reversal strength than usually single Doji.
Double Doji is presented with yellow color on the image above.
We know that the Doji Star or Single Doji reflects the indecisions in the market. Where the Single Doji ends, the Double Doji begins. By the end of the single Doji, the indecisive period comes to an end, and the Double Doji pattern shows a great change in the direction of the trend.
A Single Doji is usually a strong reflector of reversal, but the two consecutive Dojis present a much greater indication which often ends up in a strong breakout. This strategy allows you to capitalize on the strong directional moves in the market that unfold when there has been a period of indecision. The traders can look for the desired trend after the Double Doji and trade accordingly.
Doji Candlestick Pattern and its Application
There are so many candlestick patterns, and it is easy for any trader to get confused. However, the Doji candlestick is known for its unique ‘cross’ shape, difficult to miss. This shape appears when a pair of currencies closes and opens at the same level. This leaves a small, and more often than not, a non-existent, body. You will see that the upper and the lower wicks are of the same lengths. As we mentioned earlier, generally, the Doji pattern stands for indecision in the market. However, many traders use it as an indication of an existing trend that is losing its momentum.
Benefits of Using the Doji Star in Technical Analysis
The Doji candlestick pattern can be used to find the ‘pause and reflect’ price movement that can prove invaluable for the traders. If the Doji pattern appears when the market starts to trend upwards, traders can take this as an indication of buying momentum slowing down. On the contrary, it could also depict that the selling momentum is picking up. It can be viewed as the exit signal from a long trade.
Although traders are advised not to blindly move according to the selling indication and consider his previously set exit strategies and the coexistence of a technical indicator with the Doji pattern, this will help them to cross-check the reality with the indications of the market and be assured that what the market is offering would be beneficial to him in reality as well. This practice of conducting a cross-check is important because the market may show the trend for a limited period or be just a flicker in the trend. Therefore, this careful analysis comes in handy if the trader doesn’t want to lose his trade in a hush decision.
Types of Doji Pattern
Doji Candlestick Types are:
- Long-legged Doji
- Standard Doji
- Gravestone Doji
- Dragonfly Doji
- 4-Price Doji
Whenever there is indecision in the market, traders use the Doji candlestick pattern. However, it is important to highlight that the Doji star pattern is often associated with this kind of market. There are 4 other variations of Doji that have different ways to help the trader understand the market from different points of view and make decisions accordingly.
As we have discussed above, the Doji pattern alone cannot be trusted as an indicator. It must be accompanied by a strong and significant signal to establish what it has been forecasting properly. Risk management is also a great way to steer clear of unexpected losses that may occur if things unfold differently from what the pattern has predicted.
Below are the different types of Doji patterns, their meanings, characteristics, and how to identify them.
Doji star pattern has the same closing and opening prices, and the upper and the lower wicks are all small and have the same length.
As we know by now, the Doji star pattern or the traditional Doji pattern represents indecision in the market. Therefore, it is out of the control of the seller and the buyer. There are often hints of a trend reversal. There is nothing new about the fact that while trading in this particular pattern, there is a need for a strong signal that can truly support the trend predictions.
The long-legged Doji pattern has the same closing and opening prices, and the upper and the lower wicks are extended.
It is often associated with a market that has greater volatility. Just like the Doji star pattern, it also shows indecision in the market.
The Long-Legged Doji commonly has a larger expansion of the vertical lines beyond and beneath the horizontal line. By this, we can make out that the candle price movement energetically fluctuated at the time frame of the candle price movement but locked at nearly the similar level that it opened. This demonstrates the inability to make decisions between the seller and purchaser.
In the spot where The Long-Legged Doji appears, it is noticed that the rates are recalled just after a reasonable downward move. In case Doji serves at the top of the retrieval (that we are unaware of while it is still developing), a dealer can now clarify his/her decision and possible changes in a direction. And later on, looking forward to minimizing the combination of the upcoming candle next to Doji. For The Long-legged Doji, The stop loss will be spotted on the tip of the uppermost wick.
Dragonfly Doji pattern is similar in shape to the letter “T,” where it has the same closing and opening prices, and the lower wick Is extended while the upper wick doesn’t exist.
You will find this pattern tucked away at the bottom of a downtrend. It shows that lower prices have been rejected. It signals a bullish trend. It shows a change in the price direction.
A Dragonfly Doji resembles a ‘T’ shape. It signifies the upcoming change in the trend, mostly bullish. It strongly opposes the lower prices and can be seen at the bottom of a downtrend, hence, the bullish signal. The Dragonfly Doji can be seen at the elite of an upward move or the base of a downward move and indicates the possibility of changes in a direction. No line will be observed beyond the horizontal bar, making a ‘T’ pattern and implies that rates never moved beyond the opening prices. An expanded, reduced wick on this Doji at the base of a bearish movement is a much more bullish indication.
Traders usually look for its formation at the resistance and support levels to trade with the Doji candlestick. In this case, the Dragonfly Doji can be seen at the trendline. This rejection of lower prices signifies that the trader can expect a bullish trend and prepare for a selling trend.
Gravestone Doji pattern has the same closing and opening prices, and the upper wick Is extended while the lower wick doesn’t exist.
This pattern is found at the top of an uptrend. It shows that higher prices have been rejected. It signals a bearish trend. It shows a change in the price direction as well. The Gravestone Doji and Dragonfly Doji are inversely proportional to each other. It occurs as the movement of rates starts and ends at the bottom end of the trade limit. Once the candle was opened, purchasers could push the rates upward, but they could not bear the bullish moment while closing. It indicates bearishness on the elite of an upward movement.
The 4 Price Doji
4 price Doji pattern has the same closing and opening prices, and the wicks don’t exist.
The 4 Price Doji is just a horizontal line without any vertical line beyond or beneath the horizontal. The 4 price Doji pattern represents the maximum inability to decide as all the four rates, high, low, open, and close showcased by the candle, are similar. The 4 Price Doji is an exclusive pattern that represents an unstable and peaceful market.
It comprises only horizontal lines. There is the same level for all the highs and lows and the opening and closing prices. This is a unique pattern that shows indecision and low volatility. This pattern is rarer compared to the rest as it shows the ultimate indecision in the market.
Further Knowledge for Trading with Candlesticks
Reading a candlestick chart is crucial to strengthen before analyzing more confusing skills such as Doji candlesticks.
Factors to be counted while reading candlestick charts:
- Price action
- The time frames of trading
- Classic price patterns
The study of various types of Doji will be helpful to dealers by letting them utilize this basic data when they would be trading with Doji candlesticks.
Different types of Doji indicators highlight different aspects of the market. Some represent indecision in the market, while others help traders to identify ongoing trends. Including these patterns in your trading strategy will prove to be beneficial. However, if you are new to it, use one of these patterns at a time.