Doji Candlestick Explained

Introduction

Investors can get to know the price trend by identifying candlestick charts in the technical analysis. Among them, the Doji candlestick chart may be the simplest and most intuitive pattern. Doji represents the balances between long and short, but a single Doji can be less informative because the bullish or bearish movement depends on the previous price fluctuations or trends.

Doji has many forms and combinations, all of which have different meanings that depend on the power of long and short. Doji often appears in the reversal trend. Go through this article and get to know how to interpret Doji and how to use various forms of Doji to judge trend reversal. It is recommended to combine it with other indicators or parameters.

What’s Doji Candlestick?

The Doji pattern we often see seems like a “+” shape. Compared with the candlesticks with a long entity in the general form, the entity of Doji is basically thin as a line, and its upper and lower shadow lines are longer. The wick length of its upper shadow line may be different from the tail length of its lower shadow line. As a result, a positive Doji or a reverse Doji can be formed. Doji is the most basic and simple K-line pattern that is used to judge the next price trend.

What a Doji Candlestick implies

A Doji candlestick chart means that the initial opening price and the final closing price tend to be consistent. That’s to say, the opening and closing of red and green candlesticks are the same or very close, but the gap between the highest and the lowest prices is relatively large. Therefore, the longer upper and lower shadows indicate greater volatility in the market during this period. When the upper and the lower shadow lines are almost equal, it means that the bulls and bears are in balance, and no one dominates the market trend during this period.

Doji: a signal of a reversal pattern

Doji signals that the market trend is about to change but whether it is a reversal pattern depends on the next candlestick. However, Doji presents an unresolved neutral market condition where the long and the short are in balance. Therefore, if you want to predict whether the price will rise or fall after the Doji, you need to consider the previous price fluctuation and trend as a whole.

Five Doji Patterns

By ＭS.AMANDA

1. Small Doji Pattern

By ＭS.AMANDA

The small Doji refers to the k-line with very short upper and lower shadow lines, indicating small price fluctuations. It usually appears on the upper and lower tracks of the horizontal Bollinger Bands, which means that it is still in a volatile market. The second Doji appears in a rising or falling market, which may not change the original trend in the future, but only indicates a temporary market correction. That’s why it is of little reference value.

2. Big Doji Pattern

By ＭS.AMANDA

The big Doji refers to the candlestick with long upper and lower shadow lines, implying that the rising market encounters strong short resistance, or the falling market encounters strong bull support, which means the market will reverse. It is a good time to enter the market. For example, if you were a short trader with the trend at that time, you should stop the trading action. It is recommended to observe the situation first before taking the next trading action.

3. Dragonfly Doji

By ＭS.AMANDA

This candlestick is also known as the Dragonfly Doji, referring to the Doji whose lower shadow is longer than the upper shadow. It implies that the opening and closing prices are quite similar. In the red candlestick chart, the price first rises slightly, then falls back, and finally rises again, while in the green candlestick, the price falls at the opening and then meets strong bulls (the Asian K-line, idiomatically red presents a rise and green a fall) because the shorts dominate at the opening and pull down the price, and then the bulls force suppresses the price, the strong support at that time and the performance of bulls starting to reverse from a downtrend. Whereas, it should be noted that we can only use Dragonfly Doji as a reference when it appears in a downward trend.

In addition, if this K-line appears near the support level of the downward trend, it represents the emergence of a long force, indicating that the market may change. The bullish sentiment is high at this time, and the price will stop declining.

If it appears near the pressure level of the upward trend, it means that the upper pressure is strong, and the upward trend may reverse here. But it is just a weak signal because the bulls who rebounded did not break through the previous high of the intraday price. If there is a Dragonfly Doji after the continuous rise, it means that the bulls’ rising strength is weaker than the selling pressure from the shorts’ falling. After the forecast, there may be a period of consolidation due to the weakening of the upward momentum, but it may also rise again along the previous trend. That’s why we don’t regard the Dragonfly Doji in the upward trend as an obvious reversal signal, but we can still use it as a reference to identify a change in the market trend.

4. Gravestone Doji

By ＭS.AMANDA

Also known as the tombstone Doji, this pattern refers to the Doji whose upper shadow line is longer than the lower shadow line. It means that if the price rises, the K-line will rise as soon as the opening begins, and then falls, and the closing price will approach the opening price; The second situation is that if the price falls, the K-line will fall sharply at the opening, then it pulls up, and the closing price was close to the opening price. In the beginning, the bulls are the main force and push up the price, and then the price is pushed down after it encounters the bear force.

The appearance of the Gravestone Doji represents an upward pressure resistance, where the short selling pressure strengthens, and the upward trend may be reversed because the appearance of the Gravestone Doji symbolizes bearish sentiment which prevents the price from continuing to break through the high point. It should be noted that the Gravestone Doji is opposite to the Dragonfly Doji. The former is of greater reference value in an upward trend. It is a clearer entry signal. Investors can trade after a trend reversal forms an evening star.

5. Straight Line Pattern

By ＭS.AMANDA

The straight line pattern is a special K-line with very short upper and lower shadows or even no shadows at all. For this pattern, the opening and closing prices tend to be consistent, which rarely occurs in the market.

Three Combination Structures of Doji

1. Morning Star

By ＭS.AMANDA

Morning star, as the name suggests, is just like the sun rising, indicating that the price rises after the end of the falling market. The morning star is composed of three K-lines. The left one is a big red candlestick, the middle one is a candlestick with a shrinking trading volume, and the right one is a big green candlestick. This pattern usually appears at the bottom of a downtrend and is a bullish divergence pattern releasing a stronger trend reversal signal.

2. Evening Star

By ＭS.AMANDA

Opposite to Morning Star, Evening Star is just like the sunset. It means that the rising market will come to an end. It is also composed of three K-lines: a big red candlestick on the left, a small Doji in the middle, and a big red candlestick on the right. This pattern usually occurs at the top of an upward trend, constructing a conversion process from bullish to bearish under the balance of long and short.

It is worth mentioning that if there is a gap between the middle Doji and the candlesticks both on the right and left, the reversal signal is stronger and it is a good time to sell short.

3. Continuation Doji

By ＭS.AMANDA

Continuation Doji usually appears in the consolidation stage when the market rebounds, which means it can continue the previous general trend. Its formation principle and process is almost the same as the previous two patterns, but it appears in a different place. If it appears in a rising whipsaw or a falling rebound place, it forms a continuation of Doji.

Signs and illusions of the Doji pattern

The Doji pattern in the K-line chart is in the price formation stage. The price moves up and down and finally closes near the opening price. The long and short are in balance and unable to raise or lower the price. This point is likely to become a key point that can be used to predict the next trend and allows investors to profit from it.

When the price trend forms a Doji pattern, an important indicator in the market emerges. It presents a balance between the long and short forces.

Doji does not work after a strong trend

If the previous price is in a bullish trend when Doji appears, it will mean that someone is selling at a high price at this time, and the short seller also expects that there will be a chance to make short profits. But if the bullish trend continues and gives no signs to stop, it could be that the Doji is a false signal, which will trick the bulls into pushing the market price to a new high.

Generally speaking, the appearance of the Doji star means that the previous trend may have a short pause to pave the way for the subsequent trend. At this time, investors can seize the opportunity to enter the market when the trend continues. However, it is necessary to make such an analysis based on an overall trend, and this prediction does not work every time.

By Gate.io

Doji appears in an unknown trend and confuses the judgment

If a Doji pattern appears when the trend is not clear during the sideways trading period, there may be a one-way market, followed by a continuous and sharp rise or fall. Such unidirectional changes may catch investors off guard, and they could miscalculate future trends.

By Gate.io

Multiple Dojis show a pending market

If only one Doji appears, it means that the market will go through a callback or shock. However, if multiple Dojis appear in the short term, it predicts that the trend is still unclear and cannot be used to make a judgment. For example, there may not be a sharp rise or fall in prices until major relevant news that affects the market is announced. This is a pending market during which multiple Dojis are very likely to appear.

How to utilize the reversal trend of the Doji Candlestick to improve your trading strategy?

There are no 100% accurate indicators or trading methods in the trading market because the uncertainty of future prices in the market could possibly be used to formulate trading strategies with potential profits greater than losses. In addition to a reasonable profit-loss ratio range, a clear and accurate Doji also has support lines and resistance lines, which will help traders analyze the overall price situation. Apart from being used to judge the trend, the Doji pattern can also be utilized to find the entry point.

To find the correct Dragonfly pattern, you can find out clear support for the entire pattern by observing the Doji. Time is also a key factor. A higher time frame can increase the accuracy of the overall forecast. The same method is applied to find the Gravestone Doji. First, find out the high point of the Gravestone Doji to confirm whether it has a strong pressure line. A longer time is also required to make an overall judgment, which will be more effective. It is worth noting that a Doji pattern, especially the one that appears at key points of support and resistance, may also help to validate or strengthen other reversal indicators.

Example:

The K-line shown in the above picture is a consolidation stage in the downtrend. After a big green candlestick appears, sideways trading emerges. However, the price has never really broken through the upper resistance line around 16594.3. Moreover, the first Dojo pattern appears, and the second one follows. This is a bearish signal. Then the whipsaw comes to an end, and a big green candlestick emerges after a falling trend.

Conclusion

When the opening and closing prices of the red and green candlesticks are almost the same, a Doji pattern forms. We can say that a Doji pattern is a neutral indicator. It can be used to judge the strength of long and short sellers according to their different positions. Then, the potential effective high and low positions can be predicted, allowing investors to determine the trading decision. However, a Doji pattern itself cannot provide clear information. What can be predicted is based on the previous price trends, and the predicted information is often a false signal. Investors need to use it by combining it with other technical indicators and support lines or resistance lines. It is advisable to use the Doji pattern with high trading volume and long time frame which is of more reference value.

The Doji pattern can be used as a signal for entering the market. However, as a disadvantage, it cannot be used to predict the position of the exit point. It only provides users with a direct conversion signal, but cannot allow them to see the price fluctuation range and how widely the influence will expand after the reversal. It is also necessary to consider the long-term time frame to find the pressure line and support line, to confirm whether it is a false signal. When there are too many Dojis at the same height, it may just be a period when the market is pending. As a result, it has no reference significance and does not constitute a valid signal. Therefore, the Doji pattern can only be judged as a point to enter the market. It is still necessary to refer to other indicators on the market to take overall trading actions.