Trading the Doji Candlestick Patterns

shuten doji candle

Doji candle represents one of the most popular candlestick patterns, providing information both on their own and as components of a number of important patterns. In this article will breakdown the most powerful Doji candlestick pattern for forex trading.

What is Doji 

“Doji” is Japanese for “at the same time.” They depict time frames when the closing price is the same, or very nearly the same, as the open.

Doji lines are among the most important individual candlestick patterns, according to Steve Nison, the father of candlestick charts, and can also be important components of other multiple-reversal candlestick patterns.

Doji form when a forex pair's open and close are virtually equal. The length of the upper and lower shadows can vary, with the resulting candlestick looking like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word “doji” refers to both the singular and plural form.

shuten doji candle

Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji conveys a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing.

Different currency pairs have different criteria for determining the robustness of a doji. Determining the robustness of the doji will depend on the price, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji should have a very small body that appears as a thin line. Steven Nison notes that a doji that forms among other candlesticks with small real bodies would not be considered important. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

Continue reading or play around in a risk-free forex MT5 demo account and identify Doji pattern works in real-time.

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Doji and Trend

The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the uptrend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick's open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.

After a decline or long black candlestick, a doji indicates that selling pressure may be diminishing and the downtrend could be nearing an end. Even though the bears are starting to lose control of the decline, further strength is required to confirm any reversal. Bullish confirmation could come from a gap up, long white candlestick or advance above the long black candlestick's open. After a long black candlestick and doji, traders should be on the alert for a potential morning doji star.

Long-Legged Doji

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session's opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open.

Dragonfly Doji

Dragonfly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a “T” due to the lack of an upper shadow. Dragonfly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragonfly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragonfly doji could signal a potential bullish reversal or bottom. After a long uptrend, long white candlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversal or top. Bearish or bullish confirmation is required for both situations.

Gravestone Doji

Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside-down “T” due to the lack of a lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragonfly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, the focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, the focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.

Final notes about Doji Patterns

As was presented above, the Doji formation can be created two different ways, but the interpretation of the Doji remains the same: the Doji pattern is a sign of indecision, neither bulls nor bears can successfully take over.

If a doji appears after an uptrend, and especially if it follows a long white-bodied candle, it represents indecision at a significant high, at a time when bulls should still be decisive. It can also be read as a sign that supply and demand have reached equilibrium. Either way, it is seen as a warning that the uptrend is ending. (If it appears after a long decline, it warns that a downtrend is ending.)

There are many ways to trade the various Doji candlestick patterns. However, traders should always look for signals that complement what the Doji candlestick is suggesting in order to execute higher probability trades, that can be oscillators like Stochastic, MACD or RSI that should show a bullish divergence and oversold with Doji pattern appearing at the bottom or bearish divergence and overbought with Doji pattern appearing at the top. Additionally, it is essential to implement sound risk management when trading the Doji in order to minimize losses if the trade does not work out.

Understanding doji candlestick patterns is important, but if you want some help, MetaTrader 5 AM Broker offers a useful charting toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how candlestick patterns can make you serious money.

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