Doji candlestick patterns
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Doji candlesticks appear when the opening and closing prices of an asset are virtually the same. They can therefore be recognised by their much shorter body than typical Japanese candlesticks.
They indicate that market sentiment is indecisive, with a relatively even balance of bulls (buyers) and bears (sellers) unable to push prices decisively in one direction. Depending on their type, they can help you recognise when a price move or trend may be slowing down and when a price might reverse course.
This can help you exit a trade before a trend is coming to an end or enter into a new trend as it starts.
Stars, long legs, gravestones and dragonflies
There are four types of doji candlestick:
- Standard or 'star' doji
- Long legged doji
- Gravestone doji
- Dragonfly doji
Their names describe their appearance, as shown on the diagrams below.
They are all similar in that the opening and closing prices are the same. However, the position and length of the candlestick's wicks are different for each.
The standard doji candlestick, seen to the right, has two short wicks that are of a similar length both up and down. It appears when the candle has opened and closed at the same level and has moved in a very small range in between.
It indicates extreme indecision in the market and a lack of commitment from traders. If other indicators suggest that prices are overbought or oversold, it can mean a price reversal is imminent.
Long legged doji
The long legged doji, seen to the right, has long upper and lower wicks and appears when the price has moved up and down dramatically before the candle closed at the same level as it opened.
It also indicates indecision between bulls and bears but suggests that traders are becoming more active and that a volatile price move may soon occur.
The gravestone doji, seen to the right, has a long upper wick and appears when a candle's open and close occur at the low end of its trading range.
It indicates that a current uptrend may be coming to an end with the price about to reverse downward.
The dragonfly doji, seen to the right, has a long lower wick and appears when a candle's open and close occur at the high end of its trading range.
It indicates that a current downtrend may be coming to an end with the price about to reverse upwards.
Best in trending markets
Because they alert you to the slowdown in a price move or a possible reversal, doji candlestick patterns work best when markets are trending.
They can be unreliable in ranging markets. This is because markets are naturally full of indecision during these times and price moves are small, making it harder to recognise when a doji candlestick is giving a valid signal by appearing.
In this lesson you have learned …
- … doji candlestick patterns occur when the opening and closing prices of an asset are the same.
- … they indicate that markets are indecisive, with a relatively even balance of bulls and bears.
- … there are four types of doji candlestick, which can help you recognise when a price move or trend may be slowing down and when a reversal might occur.
- … they can help you exit a trade before a price move ends and jump on a new trend as it starts.
- … the standard or star doji candlestick has two short wicks that are of a similar length above and below. It indicates extreme indecision and in overbought or oversold markets it can predict a price reversal if other indicators confirm this.
- … the long legged doji has long upper and lower wicks. It indicates indecision but suggests that traders are becoming more active and that a volatile price move may occur soon.
- … the gravestone doji has a long upper wick. It indicates that a current uptrend may be ending and a downward reversal is about to occur.
- … the dragonfly doji has a long lower wick. It indicates that a current downtrend may be ending and an upward reversal about to occur.
- … doji candlesticks are best used in trending markets and can be unreliable in ranging markets.