Undoubtedly, the doji candle is a strong pattern, but depending on what form it takes, it is given more or less weight. This section deals with different types of doji candlestick patterns. As with stocks and other securities, the formation of a doji candlestick pattern can signal investor indecision about a cryptocurrency asset. This situation causes the candle to be bodiless with only the wicks and a mark at the open/close price level. As the crypto market works 24/7, doji candlestick may occur depending on the scale of the chart. The position of the open/close price level mark on the wick is determined by the high and low extremes of the price.
What does a doji mean in a downtrend?
In Japanese, Doji means mistake or blunder. It often appears during an uptrend or a downtrend, signifying equality between bullish and bearish trends.
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. Neither bulls nor bears were able to gain control and a turning point could be developing.
Types of Doji
Answering these questions can provide insight into where an instrument’s price may move after Doji forms. Technical analysis can be used when analyzing doji candlestick patterns to signal potential trading opportunities. Now that we know some technical analysis concepts and questions to keep in mind, we will look at the various Doji chart types and discuss some ideas on how to trade them.
These charts have been in use for centuries (they started being used in Japan in the 17th century). Assuming the risk vs. reward ratio is acceptable, you may then determine the appropriate size trade to place based on your percentage risk per trade. As a general rule of thumb most traders do not risk more than 1-3% of their total trading capital (1-3% account balance). In addition, there is a type of candlestick with a small body and one or two very long shadows.
How a doji pattern is useful to traders
A doji pattern is an important part in day trading because it usually tells traders that a reversal is about to happen. Therefore, if you are unsure about what will happen, the doji can act as a good guide to you. When placing a buy order it is extremely important to account for the spread for that particular market because the buy (ask) price is always slightly higher than the sell (bid) price.
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. In short-term trading, one should take profit at the nearest support levels. More patient traders can wait until the price tests the resistance trendline to see where the price will go next.
Traders can wait until the market moves higher or lower, immediately after the Double/Triple Doji. In the TECH100 chart below, the entry point can be below the low of the three Dojis with a stop loss placed above the highs of the three Dojis. By the end of the day, the bears had successfully brought the price of GE back to the day’s opening price. So, in this case, the market came up higher into the area of resistance which is simply the highs of the Long-legged Doji.
There are several types of candlestick patterns that traders use. Some of these patterns are the evening star, morning star, doji, hammer, engulfing, and piercing lines among others. A Doji candle is a type of candlestick formation that appears when the open and close prices are nearly equal and the shadows are sufficiently long. The horizontal line of the Doji pattern is referred to as the body, and the vertical line is known as the wick. There are numerous Doji patterns, such as the long-legged, gravestone, and dragonfly Doji. In fact, Doji can also be used to show that a trend is losing momentum.
Doji trading strategies
As with other candlestick patterns, this started being used in Japan in the 17th century (in rice trading for the most). While these patterns are essential, you need to realize that they are never accurate. If it forms a doji during an uptrend, it is a bearish and vice versa. It is formed when the open, high, and close prices of an asset are similar. When there is a long lower shadow, it suggests that there was an aggressive selling phase.
Traders should only exit such trades if they’re confident that the indicator or exit strategy confirms what Doji is suggesting. When you see a Doji candlestick pattern, you know that the session closed very near to where it opened, which is why the candle doesn’t have a body. If the Dragon Doji pattern forms at the end of a downtrend, it can be considered a buy signal, as shown below. The Dragonfly Doji appears like a T-shaped candle with a long lower wick and almost no upper wick. It means that the open, the close, and the high price are almost at the same level.
The dragonfly doji pattern doesn’t occur frequently, but when it does it is a warning sign that the trend may change direction. Following a price advance, the dragonfly’s long lower shadow shows that sellers were able to take control for at least part of the period. While the price ended up closing unchanged, the increase in selling pressure during the period is a warning sign. When buying and selling are almost the same, this pattern occurs. The future direction of the trend is uncertain as indicated by this Doji pattern.
- In the classic Doji pattern, the opening price should match the candlestick’s closing price, but there can be minor discrepancies of several ticks.
- Therefore, a Doji may be more significant after an uptrend or long white candlestick.
- On the other hand, its occurrence in a downtrend hints at a potential upside retracement.
Every assumption should be confirmed by other market analysis tools. Normally, a doji candlestick appears as the market opens, and bullish traders drive the prices higher. When bearish traders attempt to reject the higher price, the price pushes lower. The body of the Doji candle displays the variations between an asset’s opening and closing prices. The bottom wick represents the low price, and the top wick the highest price. A doji formation generally can be interpreted as a sign of indecision, meaning neither bulls nor bears can successfully take over.
Does it matter if a doji is red or green?
A green close suggests upward rally and a red close indicates weakness. Dragonfly Doji, if supported by strong rising volumes, can result in a reversal trend that possesses a strong underlying strength.