What Is A Doji Candlestick Pattern?
Doji Candlestick Pattern is a commonly found candlestick chart pattern for financial instruments like stocks, currencies or commodities, used for technical analysis. A Doji candlestick pattern forms when stock’s opening and closing price is nearly similar for a given period of time.
Doji is a Japanese word that means “a stupid mistake”. Alone Doji candlestick pattern is a neutral one, but combined with previous candles, it is considered as a trend reversal signal.
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How A Doji Candlestick Pattern Forms?
A Doji candlestick pattern forms, when bullish traders push the prices of stock up and bearish traders push the prices down, and the price of the stock goes upward and downward but rests without confirming either direction. The upper shadow and lower shadow forms because of upward and downward, but the opening and closing price are the same or nearly the same.
How Doji Candlestick Pattern Works?
A Doji candlestick pattern represents the supply and demand equilibrium, where neither the bullish traders nor the bearish traders are winning. For an uptrend scenario, the bullish traders have by definition won previous battles because the prices have recently moved higher. Now when the Doji candle forms it means the bear has found the courage to sell and the trend may reverse. Similarly after the downward price movement, if a Doji forms, that is an indicator of a trend reversal, and price may go upward.
Technical analysts should watch the Doji pattern carefully and analyze them carefully. For example, if a stock or index you’re watching is still in the very early stages of an uptrend or downtrend, then it is highly unlikely that the Doji will work as a trend reversal. Similarly, if the Doji forms in the middle of a Bollinger Band, it signifies a pause in trend rather then a trend reversal.
A trader should not trade with a Doji alone, they should wait for the next candle after a Doji candle forms, for the confirmation.
Types of Doji Candlestick Patterns
There are four different types of Doji candlestick patterns, based on their formations.
A Neutral Doji is a single candlestick that does not signify that much and the opening and closing price are the same. To understand this type of Doji, traders have to observe the prior price action and candle building up to the Doji.
The Long-Legged Doji simply has a bigger wick in the candlestick above and below the opening and closing price line. This type of Doji indicates that during the time period of the candle price moved dramatically up and down but virtually end up at the same level that it opened.
The Dragonfly Doji, appears both at the top of an uptrend or the bottom of a downtrend price action and signals the potential for a reversal in price and its direction. There is no wick above the horizontal price bar which creates a shape like the English letter “T” and it signifies that prices of the security did not move above the opening price. A very long lower shadow on this Doji at the bottom of a bearish move indicates a change in trend.
The Gravestone Doji is a type of Doji candlestick pattern and it is the opposite of the Dragonfly Doji. It appears when the security’s price opens and closes at the lower side of the candlestick and the candle should have a long wick above the horizontal price bar. After the opening of a candle, buyers were able to move the price upward but by closing they were not able to sustain the bullish momentum and it is also a trend reversal pattern.
The Bottom Line
After a longer uptrend, if a Doji candlestick appears, then it is a warning sign that the price of the stock has reached the peak or is close to the peak and there will be a trend reversal. So Always recognize the Doji when it appears and be prepared to take an appropriate trade.