Doji Candlestick Pattern: Definition, Formation, Types, Trading, and Examples

The Doji symbol represents a state of indecision and balance between buyers and sellers in the market. The Doji candlestick pattern is a technical indicator used by analysts to gauge the future price movement of securities. The pattern generally forms when the market opens with bullish trends that drive the price up.

• Anyone interested in learning more about the long-legged doji may want to consider enrolling in one of the best technical analysis courses.
• This is why technical analysis exists — to give traders signals on what will happen based on facts and data.
• When a shooting start has a very small body we treat it as a gravestone doji.
• The name doji comes from the Japanese word meaning “the same thing” since both the open and close are the same.

A Dragonfly Doji occurs when the opening and closing price is at the same level but, with a long lower wick. If you do, you’ll never have to memorize a single candlestick pattern again. In isolation, a Doji candlestick acts as a neutral indicator and provides little doji candlestick pattern information. In the below chart of Mayur Uniquoters Ltd, we can see that at the end of the uptrend, a Doji candle is formed, indicating that the ongoing trend has become certain. When the supply and demand factors are at equilibrium, then this pattern occurs.

How do you read a Doji?

The pattern can be found across any time frame but has greater significance on longer-term charts as more participants contribute to its formation. It is part of the broader doji family that consists of the standard doji, dragonfly doji, and gravestone doji. If the candle appears following an uptrend, it could mean that the momentum may be slowing or even reversing.

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• Following the long-legged doji the price starts to decline, thereby signifying that the long-legged doji predicted a bearish trend reversal.
• In reality, traders look for candles that resemble the below patterns as closely as possible and more often than not, the candles will have a tiny body.
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• A gravestone doji somehow suggests that bears are more potent than bulls.

Therefore, technical analysts use the tool to filter out the noise and swiftly find the trades with the highest probability. For example, multiple doji at after a long bullish market and overbought signals from the MACD indicator indicate a lower risk of going short after a breakdown of the trend. In the above chart, I have marked four gravestone doji and one harami candlestick pattern. A gravestone doji somehow suggests that bears are more potent than bulls.

Gravestone doji

Finally, the fourth and fifth dragonfly doji appeared during a trendless time when neither bulls nor bears were not powerful enough to move the market in their direction. Although a few days after these doji bulls seem more powerful, the momentum indicator does not confirm it. Moreover, these doji appear after a huge decline that needs correction.

Intra-day Doji Formations

In case of an uptrend, the stop would go below the lower wick of the Doji and in a downtrend the stop would go above the upper wick. In simple terms, a Doji candle signals that buyers and sellers offset one another. One such pattern is commonly known among traders as the Doji pattern. This guide will discuss the Doji candle, explain what it is and how it works. By the end of it, you will know how to recognize Doji patterns and what they affect price charts.

The doji marks a point in indecision in the market where the open and close prices coincide. The two patterns that follow the doji confirm that the price reversal is imminent. As seen in the image the prices start to decline after the appearance of the doji. Upon seeing the doji, investors and traders must first apply other technical indicators like the stochastic indicator or the relative strength index (RSI) to confirm the trend prediction. Investors can apply their trading strategies once the trend has been confirmed. In this case, as the predicted trend is a bearish reversal, investors can resort to strategies such as shorting.

All Doji Candlestick Patterns & How to Trade Them

To trade with doji candlestick patterns, investors and traders first determine the type of doji pattern that is present and then decide on the trading strategy. The two commonly used strategies for doji patterns include stop-loss orders and shorting. A 3-doji candlestick pattern in a row means that powerful indecision is prevalent in the market. The 3 doji candlestick pattern signals a very high possibility of an upcoming bullish or bearish trend reversal. A 3 doji pattern is formed when three doji candlestick patterns appear consecutively. The 3 doji pattern is formed as a result of a very strong sentiment of indecision prevalent in the market which prevents any fluctuation between the open and close price.

It signals a bullish reversal of the candlestick pattern and comes at the bottom of downtrends. The dragonfly Doji is shaped like a “T”, with a long lower shadow with the open, close, and high all near the same spot. The dragonfly Doji pattern acts as a bullish reversal Doji candlestick at the end of a downtrend while the bearish dragonfly Doji candlestick acts as a sell signal. The second gravestone doji appears after a harami candlestick pattern. Additionally, the momentum indicator indicates that it is possibly an overbought condition. A dragonfly doji plus a harami pattern and an overbought situation tell us to think of a trend reversal.

And, in this situation, both upward and downward movement is possible. Based on their shadows, there are five types of Doji Candlestick Patterns. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives.

Doji candlesticks can look like a cross, inverted cross, or plus sign. Also known as a bullish reversal pattern, the hammer candlestick happens when the bearish market suddenly starts moving in an opposite direction. It is when the price decline is over and the upward price movement is upcoming. Doji candlestick patterns provide accurate results and predictions when used along with other technical indicators.

For the neutral Doji, positioning the stop-loss above the high level of the candle for a short trade and below the low for a long position can be beneficial. Although a doji can indicate that a reversal of price direction is in progress, it can also be a continuation pattern where prices hover at their current value. The Gravestone doji and the Dragonfly doji are stronger indicators of price reversal than a standard doji. The Doji candlestick pattern is a formation that occurs when a market’s open price and close price are almost exactly the same.