Candlestick chart patterns help traders understand market psychology better. Japanese candlesticks are unique in the sense that they display open, close, high and low prices efficiently. The patterns discovered using the Japanese candlesticks show the battle between buyers and sellers. Some patterns signal continuation, while others predict price reversals. In addition, there are bullish and bearish patterns depending on predicted price direction. Doji is an interesting pattern in this regard. And we’ll discuss how to trade three variations of the candlestick pattern: Gravestone Doji, Long legged Doji and Dragonfly Doji.
The term is coming from Japan and it means “the same thing” word to word. And no wonder, in trading, Doji candlesticks have the same open and close prices.
In general, doji represents indecision. However, when they appear at the end or top of already established trends, Doji patterns can signal trend reversals. Depending on their shadow, there are Gravestone Doji, Long legged Doji, and Dragonfly Doji.
Why is Doji important for traders?
- It is easy to spot, so whenever it forms, most traders should be able to easily recognise it simply by looking at their charts.
- Understanding Doji in trading can help traders better prepare for trend reversals.
- It is a neutral indicator, so traders can spot both bullish and bearish trends using Doji.
Thorough Doji explanation
Originating from Japan, Doji is a candlestick pattern that indicates upcoming trend reversals when they form at tops and bottoms of already established trends. Candlestick can be called Doji, if it has exactly the same opening and closing prices, making its real body just a thin horizontal line. This line can appear at the top, middle, or bottom of the shadow and each of them has a different name. Dragonfly Doji, Long-Legged Doji, and Gravestone Doji.
Being a trend reversal pattern, Doji informs traders about potential upcoming bullish and bearish market runs. Usually, Doji does not appear frequently. Some traders still wait for the formation of the next candle (confirmation candle) in order to confirm the reversal has started. Understanding Doji in trading is important, as traders can spot reversals right from the very beginning and prepare accordingly.
Example of Doji in trading
Now for better visualization, let’s look at the Doji example in the Forex market. As we can see in the EUR/USD example, the price was going downwards. The bear trend was followed by the Doji and reversed the price. In this case, a trader could open a long position after the pattern finished forming or wait for the confirmation candle to place an order. In both cases, the Stop Loss target is right underneath the Doji’s shadow. A profit target depends on the newly established trend and its strength.
FAQs on Doji in trading
Is Doji bearish or bullish?
Doji candlestick can be both bullish and bearish, as it all depends on the direction of the prior trend. If it forms in an uptrend, the pattern is bearish. If it appears in a downtrend, Doji is bullish.
Is Doji a reversal pattern?
Doji is a candlestick chart pattern that can be considered a trend reversal when it appears at the tops and bottoms of established trends. In general, the pattern indicates indecision. When it appears at the tops and bottoms, it might indicate exhaustion and signal price reversal.