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What Is Doji
Doji is a unique pattern in candlestick charts, a common chart type for trading. It is characterized by having a small length, indicating a small trading range. The small length means that the opening and closing prices of the traded financial asset are the same or have a small difference. Doji candlesticks can take the form of a plus sign, a cross, or an inverted cross. The word "Doji" comes from the Japanese term meaning "error." The pattern follows its name, as it indicates that the opening and closing prices of an asset are the same, which is an unlikely occurrence. Doji is used to depict market indecision and serves as a signal for a reversal in an uptrend or downtrend. As part of technical analysis for traders, it is important to understand and identify trends on trading charts for currencies, stocks, futures, or bonds. In addition to understanding and identifying trends, traders need to know the different chart patterns and what they mean.Characteristics of Doji Candle Pattern
- Doji candlesticks have small or no real bodies with shadows because the open and close prices are often the same.
- This can take many forms as in the discussion.
- Often the Doji pattern is associated with market indecision before a trend reversal. In such a situation, bullish and bearish pulls have equal strength.
- Doji is a neutral direction, and traders need to interpret it carefully to form their decisions
- Not all Dojis reflect market indecision. Some indicate a trend reversal, but need to be confirmed by the candlestick pattern that forms after the Doji.
How to Use Doji Candles
There are many ways to trade when you see a doji candlestick pattern. First, look for signals that complement what the doji pattern suggests. Most traders use momentum indicators to confirm a possible doji reversal signal, as they can help determine the strength of a trend. For example, if you think that a common doji at the bottom of a downtrend means a possible reversal, you can test the bullish bias using the stochastic oscillator. This indicator tracks the speed and momentum of the market over a period of time, predicting price movements. If the signal is confirmed, you may want to buy. When you see a doji candlestick pattern and want to trade, you can do so through derivatives such as CFDs or spread betting. Derivatives allow you to trade on both rising and falling prices. So, depending on what you think will happen to the price of an asset when one of the doji patterns appears, you can open a long or short position. Follow these steps to trade when you see a doji candlestick chart pattern:- Login to your trading account
- Search for the asset you want to trade in the 'searcher' panel.
- Enter your position size
- Select 'buy' or 'sell' on the deal ticket
- Trade confirmation
Types of Doji
The information that can be gained from recognizing this pattern depends on the context in which it appears and can vary depending on the different types of doji candles encountered. There are four generally defined types of doji candles that indicate different market trends and climates:Dragonfly Doji
The dragonfly doji candlestick pattern is created when the open, high, and close of a candle are all the same or very close to the same, but the low is much lower than the other three. True dragonfly dojis are rare. Most traders allow for a slight difference between the prices. Essentially, the dragonfly shows that price opened and fell, but by the close, price was back up from the open. This tells traders that there was weakness early in the day, but by the end of the day, price had recovered, indicating the strength of the bull market. Below is a dragonfly doji on the US SPX 500 index chart.
In this case, the dragonfly doji occurs after a small pullback in the overall uptrend. As price begins to move back up, the dragonfly doji above the most recent candle indicates that sellers are retreating and bulls are taking over again. The higher price move after the dragonfly doji is called confirmation, which helps confirm this price action interpretation. The dragonfly doji candlestick pattern is formed when the open, high, and close of a candle are all equal or very close to each other, but the low is substantially lower than the other three values. The dragonfly doji is a rare find. However, some price variation is acceptable to most traders. Nevertheless, by the end of the trade, price has recovered back to its original position. This tells traders that price has finally come back up, indicating that the bull market is still going strong. The dragonfly doji occurs after a small pullback in an uptrend. As the market moves up, the dragonfly doji above the most recent candle indicates that selling is easing, and bulls are reasserting themselves. If price moves up after the dragonfly doji, this price action interpretation is verified.
Gravestone Doji
A Gravestone Doji (which looks like an inverted “T”) indicates that a stock or other financial asset opened and closed at the low price of the day. The pattern usually forms at the bottom or end of a downtrend. The longer upper side of the Gravestone Doji, also known as the shadow, signals a possible end to the current trend direction in the market and a reverse trend. This type of doji candle has a long upper shadow with a negligible lower wick and may indicate that although buyers were successful in driving prices up initially, they failed to sustain the trend at the close. If it occurs during an uptrend – especially at a resistance level or Fibonacci retracement – it may signal a bearish trend reversal. Conversely, if it occurs during a downtrend at a support level, it may indicate a bullish reversal.Long Legged Doji
A long legged doji occurs when the open and close are identical, but several significant ups and downs cause a long tail. Since both bulls and bears have swung up and down a lot, the long legged doji pattern indicates ambivalence as neither side has made significant gains. As the bearish long legged doji suggests, uncertainty may indicate that bulls are losing control after a big rally. As a result, short-term traders may be tempted to place short positions if the market continues to fall following the pattern. This type of candlestick may indicate that bears are losing momentum. Conversely, a rising market may tempt traders to place long bets if the trend continues. Traders may still be uncertain about the direction of the market, as seen in the long legged doji. However, it does confirm the possibility of further migration in the other direction. The price chart below shows a long legged doji candlestick pattern, implying a short-term top after a strong surge. Because the open and close prices are slightly different, this candle is also known as a spinning top.Star Doji (Standar Doji)
The star doji candlestick pattern can come in two forms: there is the bullish star doji and the bearish star doji. Both appear after an uptrend or downtrend in the price of an instrument and help signal different trend directions.star doji bullish
A rising star doji, also called a morning star doji, occurs after a decline and looks like a plus sign. If price moves higher after the bullish doji, it helps confirm the pattern. It is a “star” because its body should be below the body of the previous candle.star doji bearish
A bearish star doji occurs after an uptrend and looks like a plus sign. If price moves lower after the candlestick pattern, this helps confirm a bearish star doji reversal. It is a “star” because its body should be above the body of the previous candlestick.Benefits of Using Doji Candles
Just like any other pattern, Doji candlestick also has its own advantages. It is very important to keep this part in mind to decide whether to use it during trading. The advantages include: Advantages:- It can be found in any time frame for any asset.
- No special knowledge is required to define this pattern.
- It acts as a signal when the market is likely to reverse and can be used to enter or exit a trade.
- Doji is a popular candlestick pattern. This means you can identify it regularly when trading.
- Timeframes - Doji can be identified on all chart timeframes.
- Easy to identify - It is very easy to identify several types of doji patterns in the chart.
- Accurate - Although not always accurate, Dojis are usually better to use than other candlestick patterns.
