Let me start by saying that if you are unfamiliar with candlestick charts and how they work, please read Introduction to Candlestick Charts before going too in depth with the individual patterns. It will make all that follows so much easier to understand.
What is a Doji Candle?
A Doji is a candlestick chart candle that is created as a result of the opening and closing price within in a single time period (minute, 5 min, 15, 30, hourly, daily, being the same. The Doji is considered a reversal indicator when presented near the end of a trend, and also identifies a fairly even balance of buyers and sellers.
Based on the type of Doji, they can help you recognize when a trend or move may be coming to an end, and when the price may pivot and reverse direction. This can assist in exiting a trade prior to a trend ending or entering into a new trade as a new trend begins.
Doji Classifications
All Dojis are similar in a sense, due to their opening and closing prices being the same. However, based price action throughout the time period, the length and direction of the candlestick's wicks may vary. Based on these variations, there are four classifications for Doji candlesticks:
The standard Doji candlestick has short wicks both up and down that share the same length. This happens when the price of the stock opens and closes at the same price, and had minimal range in price throughout the trading time period. It identifies indecisiveness between bulls and bears. If additional indicators show oversold or overbought, it could indicate that a price reversal is imminent.
The Long-legged Doji has long wicks both up and down and do not need to be the same length. This happens when the price opens and closes at the same price, but has much more movement in price action throughout the time frame. It also identifies indecisiveness between bulls and bears, and indicates that traders are more active and that a sharp price move may happen soon.
The Gravestone Doji has a longer upper wick and occurs when a candle's open and close appear at the low end of the trading range.
When presented in an uptrend, it typically indicates that the current uptrend may be nearing its end and that the price may be about to reverse downward.
The Dragonfly Doji is just the opposite, as it has a longer lower wick and occurs when a candle's open and close price appear at the high end of its trading range.
When presented in a downtrend, it indicates that the current downtrend may be nearing an end and the price may be about to reverse upward.
Best Trading Situations
Since they can help to alert you to the current price move or trend nearing its end, and a possible reversal, Doji candlestick patterns are more reliable when markets are trending. They are considered most reliable when found in trending markets and near support or resistance on the chart. The example below shows a Long-legged doji at the bottom of a downtrend. Any doji found at the end of a long trend indicates indecisiveness in the market, signaling a change in sentiment.
On the flip side, Dojis can actually be unreliable and misleading in ranging markets. Due to the fact that markets are naturally indecisive during ranging times and price moves are smaller, it makes it more difficult to recognize if a Doji candlestick is giving a valid signal of reversal.
If you have any questions, please feel free to comment. If you learned something knew, share it with others.
Remember to stay in your "Trader Mentality."
Labels: Charts 101, Technical Analysis