Being able to accurately predict whether the quotes will move up or down is essential for profitable trading. Our article, Full guide to reversal and continuation trend patterns, has additional details on this.
The Doji candlestick pattern will be covered in the article following. Read more to see what this unique name truly implies and how this trading pattern is categorized
Identifying Doji on the graph.
A Doji is said to be the most significant type of Japanese candlestick out of all the many types. It may be used both alone as a technical analysis tool and as a part of more distinct information.
“Doji” is the Japanese word for error or inaccuracy. The presence of a Doji on the chart indicates that, despite significant volatility during the session, the market’s starting and closing prices are almost identical.
Japanese candlesticks with a very small body but lengthy shadows are referred to by this name. But while identifying this pattern, the body’s size should be the primary consideration.
The starting and closing prices for a specific time frame were almost or exactly identical if the body is relatively small.
A symmetrical candlestick with a very tiny body that shows as a thin line on the chart is another form of pattern.
If the starting and closing prices differ significantly somewhat, we get an asymmetrical pattern. However, the acceptable deviation range is not explicitly defined.
According to some experts, the body of the candlestick in the Doji pattern shouldn’t occupy more than 5% of its whole length, including the shadows. We are discussing the Spinning Top pattern if this ratio is broken.
Regarding this, the asset’s price is another crucial factor to consider.
Let’s imagine that the average price per share for the shares of a specific company is 500 standard units. A Doji is present when the difference between an open and close is 0.5 units.
If the value of a security is 10 standard units, then a difference of 0.5 standard units will appear on the chart as a pattern with a lengthy body.
In addition, it’s crucial to consider the instrument’s historical volatility and to examine any other candlestick patterns that emerged before the Doji candle.
In actuality, this pattern depicts the conflict between buyers and sellers throughout a specific time frame. Both the bulls and the bears have lost if a candlestick is exactly symmetrical, which indicates that neither party was successful in taking control.
Doji also refers to:
- The power of buyers and sellers is equal.
- No market players who might be able to affect the quotations are involved.
- A level is being tested.
However, the first option is the most popular. A Doji is said to represent market uncertainty and hesitation.
The efforts of buyers and sellers eventually become equal until one party has an advantage over the other.
And the winning side will determine the price’s future course.
The following factors should be taken into account while trading the Doji candlestick pattern:
1. A Doji is considered more important if it occurs with other candlesticks with lengthy bodies. However, a Doji that develops among candlesticks with small bodies is viewed as being less significant.
2. Symmetrical Doji candlesticks are more important than those that only show the difference between the starting and closing price.
3. The pattern’s rising or falling character is determined by the trend that came before it and the confirmation that will come later. Doji are regarded as neutral patterns when they stand alone.
What exactly is Doji?
As previously said, the body is the most crucial aspect of a Doji. When detecting the pattern, traders should concentrate on this factor.
However, because most Doji have shadows, let’s talk about what they imply in different contexts.
1. If the upper and lower shadows are the same length, this indicates that bulls and bears both worked equally hard to obtain control of the market. If a Doji is not symmetrical, the body reveals who has the advantage in this battle. If the pattern is completely symmetrical, then neither side has succeeded.
2. Short shadows suggest that the price range was relatively restricted for the provided time frame. In other words, buyers and sellers have almost reached a point where their efforts are roughly equal during a given time period.
3. If one shadow is longer than the other, one of the sides was once dominant in the market. A lengthy upper shadow indicates that bulls are in control. A lengthy lower shadow represents a strong bear.
So, the candlestick body should be your first stop when trying to identify a Doji on the chart. The pattern will, however, show up as a line on the chart if it is true, so keep that in mind.
We should also concentrate on the shadows of the Doji pattern in order to better comprehend it. Below, we’ll talk about this.
Types of doji candlesticks
The first method of categorization is based on the advance made by either bulls or bears over a specific period of time. In this instance, we are discussing an asymmetrical pattern.
Therefore, even if it is a very slight advantage, buyers are in the lead if a candlestick closes above the opening level.
These Doji are either green or white.
In contrast, the candlestick is seen as bearish and is crimson or black in hue if the price has marginally declined. Experts also point out that the Doji candlestick’s colour is only marginally significant.
An exact Doji is neither bearish nor bullish because the open and closing levels have matched.
The second categorization method is based on the size of the Doji shadows, giving the impression that:
- a cross;
- an inverted cross;
- a plus sign
Therefore, the following types of Doji candlesticks are distinguished:
1. The Four-Price Doji: There are no shadows in this design. This signifies that the four price indications (high, low, open, and close) are all completely equal. In other words, no price changes occurred within the specified time period. This happens very rarely and usually during low-volume trade. When this pattern occurs, anything may happen: the price might invert, continue the trend, or begin a downturn. Stop trading for a time because this Doji candlestick implies a high amount of market indecision.
2. Neutral Doji: When compared to the Long-legged Doji, this kind has shorter shadows of comparable length. Because of its similarities to the plus sign (+), this design is also known as a Doji Star. This is the most prevalent sort of Doji found in many assets. Neutral Doji are frequently components of other patterns, thus, they should not be used as a single method for obtaining trade signals. Some experts consider them to be a distinct kind, while others consider them to be varieties of Long-legged Doji candlesticks. The distinction between these two varieties of Doji, as well as other patterns that will be discussed later.
3. Long-legged Doji: Its notable characteristic is the length of its top and lower shadows. If its shadows are the same length, it is known as a Rickshaw Man Doji. This Doji indicates a high amount of market uncertainty as well as extreme volatility. It may signal a trend reversal or a phase of correction. Some analysts say that this pattern should only be considered when it appears at the top of an uptrend.
4. Dragonfly Doji: This design has a lengthy bottom shadow and a very thin or non-existent top shadow. The resultant candlestick resembles the letter T. It denotes that the open, close, and high prices of a specific time were all at the same level. Sellers were aggressive at the start of the session, driving the price down. By the conclusion of the day, though, buyers had stepped in and pushed the price back to the opening level. A Dragonfly Doji almost always indicates a trend reversal. During a downtrend, the same is true when the Doji follows a long bearish candlestick. This pattern is especially relevant when it appears at the bottom of a downtrend.
5. Gravestone Doji: This design is the inverse of the Dragonfly Doji in that it has just an upper shadow and no below shadow. If it is followed by a lengthy bearish candlestick, the Gravestone Doji can be a powerful reversal indication during a downtrend. The same is true for an uptrend when the Doji appears following a long bullish candlestick. The signal is especially important when it appears at the peak of an uptrend. Both Dragonfly and Gravestone Doji need confirmation of a reversal. Focus on the candlestick that follows the Doji for this. It should be optimistic before a potential bullish reversal and negative when an uptrend is likely to turn down.
It is often assumed that a Doji always indicates a reversal. But this isn’t always the case.
In practical terms, a Doji represents the market’s sense of uncertainty. The following elements need to be taken into account in order to predict the price’s future move:
1. The surrounding setup.The significance of a Doji appearing among other candlesticks with small bodies and extended shadows is minor. Most likely, it indicates a phase of consolidation that might continue for a while.
On the other hand, nearby candlesticks with lengthy bodies should be taken seriously, particularly if they are close to a level of support or resistance;
2. The trend. A reversal is quite likely if a Doji shows up following a consistent and noticeable trend. A certain amount of imbalance between the trading forces is necessary for a trend to continue. Demand must exceed supply for an uptrend to continue, and supply must exceed demand for a downtrend.
A Doji, on the other hand, indicates that the efforts of the bulls and bears are almost equal. This is an indication that the trend is declining and might change course at any time.
As was already said, in order to confirm or cancel a reversal, focus needs to be given to the candlestick that comes after the Doji. You might determine whether there has been a change in the price direction by using these three suggestions:
- A Doji is followed by a candlestick with a long body. The pattern should be bullish if it was preceded by the downtrend or bearish if it was preceded by the uptrend;
- A Doji is followed by a candlestick that formed a gap in the opposite direction;
- The closing level of the candlestick following the Doji is way lower than the previous close in case of an uptrend or higher in case of a downtrend.