In candlestick patterns, we have a special candle which is formed with no real body and is called the doji. This means, closing price of the candle is at the same price as open, the market ends where it began. As you will see, a doji looks more like a cross.
Doji is another important indecision candlestick pattern. It comes in different shapes and forms with either no body or a very small body to indicate indecision among buyers and sellers.
If you are seeing a doji on a daily chart, it means throughout the day there was a strong fight between buyers and sellers, and in the end, nobody won the battle. In other words, a whole lot of trading takes place throughout the day but when it’s all said and done, the price is right back where it started.
A normal Doji is similar to a spinning top.
In a bullish or bearish market, formation of a doji indicates strong rejection of the trend. There might be a stop or change in motion or momentum due to the uncertainty or indecision created at peak or troughs.
We have several varieties of dojis. Here are different forms of dojis;
- Long-legged Doji
- Dragonfly Doji
- Gravestone Doji
Long-legged Doji
A normal Doji will be referred to as long legged Doji, if it consists of long upper and lower shadows and has approximately the same opening and closing price, resulting in a small real body.
Majority of the time, you will not see a perfect doji. At times doji will have an unequal top and bottom wick.
A long legged doji is considered a reversal sign when appearing in an uptrend or downtrend. However, prior price action is important before deciding whether to take a trade or not.
Dragonfly Doji
A dragonfly doji is a candlestick pattern in which the open, high and close are equal. If you get a dragonfly doji on a daily chart, it means stock opens, trades down during the day, and then at some point starts to trade back up, to close on the high, which is also the open.
Traders consider the low of the dragonfly doji as a support level, because it’s clear that buyers at that level came in and turned the trend from down to up.
Length of the wick of the dragonfly doji can signify the amount of bullish significance. Put simply, the longer the wick, the more bullish the pattern.
Although a doji does indicate indecision, a dragonfly doji is fairly bullish in nature due to the price action that is behind this pattern.
Gravestone Doji
When the open and close are both equal to the low of the day, the result is the most bearish of doji, the gravestone doji.
If you get a Gravestone doji for the day, it means the stock opens and trades up during the day, at some point of the day, selling becomes strong enough to push the price back down to open, which was also the low of the day.
Gravestone doji in an uptrend indicate a trend change to the down side.
Here are few rules when you spot a doji as trend reversal;
- A down or up trend must be in progress
- The first candle must be a long bearish or bullish candle followed by a doji. Formation of the doji is the most important factor as based on it you can recognise the type of reversal pattern.
The doji can be found at the top, middle and bottom of a trend. The gravestone doji is usually found at a top reversal. Dragonfly doji is usually found at a bottom reversal.
In technical analysis, candlestick patterns play an important role. You should pay attention to variety of candlestick patterns and indicators that can let you know the future market moves. Here is a list of candlestick patterns for your reference;
- Evening Star
- Morning Star
- Bearish Abandoned baby candlestick pattern
- Bullish Abandoned baby candlestick pattern
- Three Inside up/down
- Three outside up/down
- Inside Bar
- Bullish Piercing
- Dark Cloud Cover
- Spinning Top
- Shooting Star and Inverted Hammer
- Hammer & Hanging Man
- Gravestone, Dragonfly and long-legged Doji
- Engulfing Candlestick Pattern
- Spinning Top
- Marubozu
Be sure you practice identifying and trading these candlestick patterns on a demo account before trading them with real money.
In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
