WHAT IS A DOJI CANDLESTICK AND HOW DOES IT WORK?
In candlestick chart trading, the Doji pattern is one of the most visible reversal signals in the market. In essence, Doji is a key trend reversal pattern. However, it can also signal a pause in the trend. It all depends on the location and where it’s positioned within the trend.
The Doji candlestick,is characterized by its ‘cross’ shape. This happens when a forex pair opens and closes at the same level leaving a small or non-existent body, while exhibiting upper and lower wicks of equal length. Generally, the Doji represents indecision in the market but can also be an indication of slowing momentum of an existing trend.
How to recognize a Doji candle?
It’s very simple. Look for any candlesticks that have these two characteristics
- Very small body, centered between the upper and lower wicks.
- And longer upper and lower wicks.
The main feature of a Doji bar is that the closing price is the same or very close to the opening price. During the time period selected, when a Doji bar is formed, the price will move above and below the opening price, but by the end of the selected time period, it closes near the opening price.
Types of Doji
This is an introduction to types of Doji candlestick patterns that you can encounter in the markets. In the field of technical analysis, we can distinguish four types of Doji patterns:
- Doji Candlestick or Neutral Doji – the upper and lower wicks or shadows are equal and shorter.
- Long-legged Doji – the upper and lower shadows are very long and the body is very small. The long-legged Doji shows that the bull and bear battle has intensified.
- Gravestone Doji – both the open price and closing price are near the bottom of the shadow. The main feature of the Gravestone Doji is the long upper wick and is a common reversal pattern.
- Dragonfly Doji – is the opposite of a Gravestone Doji thus it’s found at the end of a bearish trend. In this case, both the open and closing prices are near the top of the wick. The main feature of the Dragonfly Doji is the long lower wick and is a common reversal pattern.
- Four-Price Doji – high,low,open and close are all at the same level.Unique pattern signifying indecision and low volatility.
HOW TO TRADE THE DOJI CANDLESTICK
There are many ways to trade the various Doji candlestick patterns. However, traders should always look for signals that complement what the Doji candlestick is suggesting in order to execute higher probability trades. Additionally, it is essential to implement sound risk management when trading the Doji in order to minimize losses if the trade does not work out.
A lot of the problems when trading the Doji, especially the neutral Doji, are that you’ll get many whipsaws. This often leads to prematurely being stopped out of your trades.
A whipsaw pattern involves price moving chaotically above and below a certain key support and resistance level. Whipsaw patterns are also referred to as false breakouts. We have developed our Japanese Doji trading strategy around this price feature.
We used the whipsaw pattern in combination with the Doji candle and trend analysis to our advantage. The whole Japanese candlestick strategy is based on our preferred time frame, the daily chart.
The only technical tool we would need for the Doji trading strategy is a 14-period simple moving average plotted on the daily time frame.