Doji Candlestick Patterns are one of the technical tools used to analyse the price chart of securities. Each and Every candle formed on the chart has it own uniqueness. Here in this article we will discuss in detail about Doji Candlestick Pattern and how can one use it to predict the likely move in the market.
Table of Contents
What is a Doji Candlestick Pattern?
The Doji is a candlestick pattern in which the open and close price of a candle are almost same. Generally, the doji formation represents the indecision present or a sign of trend reversal in the security.
The pattern suggests that neither bulls nor bears have gained control, creating uncertainty in the security. Depending on the formation of the pattern within a price trend, a doji can signal a potential reversal or continuation of the trend.
It appears as a candlestick with a small or no body with nearly identical upper and lower wicks. The word Doji is derived from the Japanese word, meaning “the same thing” which refers to the same or equal opening and closing price in a security.
Types of a Doji candlestick pattern
Based on the length, open and close of security different types of Doji are formed. Here are the five major types of the pattern we shall discuss in detail:-
- Long legged Doji
- Dragon fly Doji
- Gravestone Doji
- Standard Doji/Doji star
- 4 Price Doji
Long legged Doji
It is a type of Doji candlestick pattern that indicates indecision in the direction of security.It is formed with a very small or equal body with a long shadow on both sides, indicating a large number of buyers trying to push the prices higher, but the market rejects it.
At the same time, a large number of sellers trying to pull the prices lower, but fail to do sol.This rejection between buyers and sellers leads the prices to close at the same opening or with a small body formed. It indicates an indecision in the direction and also prices may reverse in an upward or downward direction.
How to trade Long-legged Doji?
Entry:- As the pattern represents indecision, the entry is preferred above or below the long-legged doji formed for a long or short position respectively.
A long-legged Doji formed at the bottom of the downtrend indicates a potential price reversal towards the uptrend. When the price of security closes above the high of the pattern, traders can enter a long position.
When the pattern forms at the top of an uptrend, it indicates a price reversal towards the downtrend. Here, when the price of security closes below the long-legged doji formed, a short position is placed.
Stop loss:- The stop loss for the position is simple, in a long position the stop loss will be the low of the pattern formed.
For a short position, the stop loss will be at the high of the long-legged doji pattern formed.
Profit Target:- As the pattern doesn’t define any profit targets it is preferred to place the targets based on the risk-reward ratios or at the next support/resistance levels.
It is a type of Doji candlestick pattern which is formed when the market is trending in certain direction and could possibly lead to price reversal post the formation of Dragonfly Doji.
The Bullish Dragonfly Doji is formation looks like “T” formation. It has a long wick at the lower half and has a very small (or body) and a small upper wick.
In this pattern, the long lower shadow shows that the aggressive selling by the sellers is absorbed by buyers to push the prices back up.
How to trade Dragonfly Doji?
Entry:- The pattern formation indicates a potential reversal in the trend.
when the dragonfly doji is formed at the bottom of the downtrend it indicates a price reversal in an upward direction.
One can enter a safe and confirmed long position when the price of the security closes above the close of the dragonfly doji formed.
Similarly, when the dragonfly doji is formed at the top of an uptrend it indicates a price reversal towards a downward direction. Here, traders can enter a safe and confirmed short position when the price of security closes below the close of the dragonfly doji pattern formed.
Stop loss:- The stop loss for the long position will be the high of the dragonfly doji candle.
Profit Target:- As the pattern doesn’t define any profit targets it is preferred to place the targets based on the risk-reward ratios or next support/resistance levels associated with the trade.
It is form of Doji Candlestick formation where the there is a large upper Wick and that is followed by a small (or no) body and there is a small wick below it. The formation looks very similar to “Inverted T”.In this pattern, the buying pressure pushes the price higher, but the market rejects the buyers, causing the price to move down and closes near the Opening price.
The gravestone candlestick doji pattern is followed by a bearish rally by putting an end to the prior uptrend, which is the opposite of a dragonfly doji pattern formed.
How to trade Gravestone Doji?
Entry:- The pattern formed at the top of the uptrend indicates a price reversal towards the downtrend. When the next candle close below the Gravestone doji pattern is formed, a short position can be initiated.
Stop loss:- The stop loss is simple for the gravestone doji pattern, the high of the pattern formed can be set as a stop loss.
Profit Target:- As the pattern doesn’t define any profit targets, it is preferred to place the targets based on the risk-reward ratios or next support levels associated with the trade.
Standard Doji/Doji Star
A standard Doji is a type of candlestick pattern with the opening and closing prices very close to each other. The wicks formed of the standard doji can be of any length but they are typically short.
The pattern formation is a neutral indicator, it shows indecision present in the market. Neither bulls nor bears are able to gain momentum.
However, the standard doji candlestick pattern can sometimes indicate reversal in the market. For example, if a standard doji appears in a strong uptrend, it may signal that the trend is about to end and a downward momentum can be expected.
The standard doji pattern can be used with other technical tools as a confirmation of entry or exit in security.
4 Price Doji
The four-price Doji is a type of candlestick pattern in which the open, high, low and close of the candle are one and the same.
It is a very rare pattern formation that indicates indecision present in the securities and appears in very low volatile markets as a single horizontal line on the price chart.
The pattern formation does not have a clear view of bullishness or bearishness present in the security.
Hence, it is not preferred to rely only on the 4-price doji pattern. So it can be combined with other technical indicators to gauge the indecision present in the security for a better view.
As discussed above a Doji candlestick pattern is an important consideration in analysing the price chart of securities to make informed decisions of the price movements.
To find better entry and exit opportunities in security, it is always preferred to use the Doji candlestick pattern in conjunction with other technical tools. It should be always understood that better risk management with good risk-reward ratios employs traders to be more profitable in the long run.
Written by Deepak M
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