Understanding the meaning of the Doji candlestick pattern
When it comes to trading, technical analysis is one of the most important tools. Regardless of whether you are trading cryptocurrencies, stocks or commodities. Traders tend to use candlestick charts when they carry out their analysis, as they reveal a lot of information about price movement. These charts can also form certain patterns which can reveal important details and serve as indicators.
One such pattern is commonly known among traders as the Doji pattern. This guide will discuss the Doji candle, explain what it is and how it works. By the end of it, you will know how to recognize Doji patterns and what they affect price charts.
What is a Doji candlestick pattern?
The Doji candlestick pattern is a pattern that forms when the market open and close prices are the same or very close. With that being the case, Dojis tend to suggest that there’s a lot of uncertainty between bullish traders and bearish traders.
In simple terms, a Doji candle signals that buyers and sellers offset one another. By purchasing an asset, buyers are trying to push its value up. However, sellers push it down by selling the asset. The two forces directly confront one another.
A Doji candlestick forms when the two groups of traders affect the price through their trading activities. It represents the difference in the opening and closing price, which are reflected through the body of the candle. For example, if the Bitcoin market opens and closes at $20,000 or thereabouts, this forms a Doji pattern.
Why is it called a Doji pattern?
The Doji pattern gets its name from the Japanese language. It means “blunder” or “mistake,” referring to the rarity of a match in opening and closing prices. As such, the Doji candle meaning is defined as the indecision of bulls and bears in the financial market.
How does the Doji pattern work?
The Doji candle is an invaluable signal for traders who wish to examine the market conditions. This comes from the fact that most traders use historical data and real-time price movement to search for signals. For example, if the market is bullish overall, and a Doji candle appears, it signals a state of neutrality and indecision. This could mean that the trend is about to reverse, so a Doji candle represents one of the reversal patterns.The same is true in the opposite direction. If the market price is falling, and a Doji forms, it could mean that the drop has come to an end.
It's worth noting, traders should not make trading decisions solely based on the formation of a Doji candle. A single technical indicator can never be reliable enough to form a solid trading strategy. Traders should always use multiple indicators when performing technical analysis.
What are the types of Doji candlestick patterns?
- Neutral Doji
The neutral Doji has an almost invisible body in the middle of a candle. This means that the upper and lower shadows are of nearly the same length. This pattern appears when the bullish and bearish trends reach near-perfect balance. The problem with it is that it usually doesn’t provide a specific signal on its own. Traders may even mistake it for a trend continuation pattern, instead of one of the reversal patterns.
- Long-legged Doji
Long-legged Doji is a pattern with very long shadows. This suggests that buyers and sellers both tried their hardest to take control of the price action. However, they were evenly matched, with no clear winner in the end. When this formation happens, the closing price is under the mid-point. As such, it’s considered a bearish signal, especially when it happens near resistance levels. If it happens above the mid-point, then it is a bullish sign.
- Dragonfly Doji
Another common type of Doji candlestick is the Dragonfly Doji. This one has a long lower shadow, while the upper shadow is non-existent. That means that the open, close, and high are all at the exact same level. This results in a candle that looks like a T. This type of pattern is interpreted as a strong buy signal when it appears at the bottom of a downtrend.
- Gravestone Doji
Gravestone Doji is the exact opposite of the Dragonfly Doji. This time, its open and close prices coincide with the low, forming an inverted T. This suggests that the bulls tried to push the price up but couldn’t sustain the bullish momentum. If this pattern appears during an uptrend, it’s considered a reversal pattern.
- 4 Price Doji
Next, we have the 4 Price Doji, which is another unique pattern, which happens rather rarely. When it does, it’s formed during low-volume trading, or on smaller timeframes. It looks like a minus-like line, suggesting all four price indicators were at the same level in a given period. That includes high, low, open and close, hence the name. Simply put, the market did not move at all during the period covered by the candle.
- Double Doji strategy
Lastly, we have the Double Doji Strategy. A single Doji is regarded as a sign of indecision, but in a good way. But, when there are two consecutive Dojis, that is an even greater pattern, which could lead to a very strong breakout.
What are the risks of using the Doji pattern?
The risks of relying on Doji candlesticks alone are largely the same as those that come with using any signal alone. Relying on it alone is not a good idea, as this candle can look neutral in most cases. If you still rely on it, you could risk missing out on valuable information before making a trade.
The Doji pattern is limited in the information that it provides. Often, it can even be missed if the traders don’t actively look for it. However, that doesn’t mean that it is not reliable.
Are the Doji candlestick patterns reliable?
The Doji can be a reliable pattern, but not on its own. The market could simply have a day of indecisiveness, and then the original trend could resume, whether bullish or bearish. Traders cannot afford to make their decisions based on guesses and luck.
This is why technical analysis exists — to give traders signals on what will happen based on facts and data. This doesn’t mean that you should ignore the Doji candlestick if you spot one. However, before you react, look for confirmation among other indicators and signals. Doji candlesticks can be a great way to identify the initial stages of a market reversal, as it’s easy to spot. However, you should gather more data before making a move.
FAQs
Are Doji candlesticks good or bad?
Doji is neither good nor bad. They don’t cause anything to happen to the market. Instead, it simply signals that the market is entering a period of indecision. If it appears in a bearish market, it could mean that the drop will halt, which might be considered good. However, in bullish markets, traders would take it as a bad signal, as it marks the end of growth.
What to do after a Doji candle?
A trader’s behavior after a Doji candle appears depends on the market trend in which it appeared. When a Doji candle appears in bear markets, it could be a signal to buy. However, traders must remember that this is not a reliable signal on its own.
What is a Doji vs. hammer?
A Doji pattern might be confused with the hammer, but the two are different signals. Dojis can be seen at any point and in any market, while a hammer candlestick appears after a price decline. It signals a bullish reversal of the candlestick pattern and comes at the bottom of downtrends.
How do you read a Doji?
Doji appears in candlesticks with a small to non-existent body. It has long upper or lower wicks and signals a trend reversal. If you spot something that might be a doji, look for other signs that a trend is changing.
