A Doji candlestick pattern is a candlestick with little difference between the opening and closing price. It indicates indecision in the markets as buyers and sellers are equally matched regarding where prices should be traded. However, this largely depends on which direction the Doji candle is formed.
How a Doji candlestick pattern works.
A Doji candlestick pattern is one of the most challenging candlestick patterns to identify. It is one of the more common candlesticks to mistake for a regular bullish or bearish candle. As the name suggests, it contains little or no natural movement in price and appears as two closed bodies with their tails touching at their apex points. The span between these two small bodies could be entirely any length and might be anywhere in between. It could represent a single day or two days’ worth of trading.
The Doji candle pattern is created when a market moves sideways or is indecisive on whether to move in one direction or the other. After this moment of indecision, prices either stay the same or move in their former direction. As a result of this indecision, investors who believed prices should be trading up and down find themselves with little to trade if they get out of their position before prices move again.
Its location does not have any impact on whether it is a bullish or bearish pattern. For example, a Doji that develops in an uptrend or at the top of the price range is just as valid as one forming at the bottom of a downtrend and has the same implications on market sentiment.
The only significant difference in the its pattern compared to other types is the price movement itself. Since it has very little to no directional movement, it comes down to whether you are looking for a bullish or bearish signal.
A bullish Doji represents indecision in the market and indicates a consolidation before continuing with the uptrend or downtrend. This type of candlestick can be an excellent buy or sell signal depending on the context and where it trades concerning other trading patterns.
A bearish Doji is formed in an uptrend or at the top of the price range. The bullish trend is losing momentum. However, it does not necessarily mean that prices are about to turn down or back up for the underlying asset.
A bearish Doji candlestick pattern is evidence that the buyers are becoming exhausted. However, it does not suggest that prices will continue to fall as there is no indication of a change in sentiment from the sellers. It simply shows a period of indecision and indicates lower prices for the asset in future trading sessions.
Its patterns are less reliable when they occur at the end of a trend, as this makes it harder to quantify whether the resistance or support level has been broken.
The best time to enter such trades is when the bearish Doji candle trades into significant support or resistance levels. Traders will usually wait for the subsequent candlestick to confirm the deceleration in the trend before entering trades. This pattern indicates that buying and selling pressure is rising, but there is still indecision on where prices will move from here.
There are a few things to consider when examining its pattern. First, its width and shape can vary quite significantly. The most common sizes are one and two days’ worth of trading. However, there are a few times where other sizes arise. For example, a Doji that forms after an uptrend is held up for four consecutive days would count as one day’s buying pressure.
The length of time a Doji lasts also varies significantly. This can be anywhere from one day to two whole weeks. This can occur when the market has been stagnant, and traders wait for a breakout or confirm the trend before changing their positions.
The height of the Doji candle body is also significant. If there is a single candle, it must have a long wick and a small body. If there are two bodies, the body will be small, and the tails will be extended.
Its color is essential to identify as well. For example, if the bodies of Doji are white or black, then it means that the close price was near the high or low price for that day. On the other hand, if the bodies are both red or green, then it means that there is an open and closes near the midpoint of the day’s trading range.
The next thing to consider is the location of the Doji pattern relative to other patterns within the candle. A Doji will often have a tail that stretches from one body to its twin, indicating that this candlestick is related in time with another pattern or series of previously formed patterns. This is an excellent way to identify the formation of a new trend or group of trend days if the price range is more than one day.
Another thing to think about is the location of stop losses. Doji patterns are sensitive to their direction because they indicate indecision in the market. If you have a stop-loss set at this location, it can be unpleasant to exit a trade because you will be taking profits just as prices start moving again in a positive direction.
When appropriately examined, it is one of the most clear-cut trading tips that you will find in the markets. These candlesticks indicate indecision in the market. However, this does not mean that it is time to turn back on your positions. Instead, a Doji will often provide an excellent opportunity to enter a trade in the opposite direction and take advantage of prices moving back into your favor.
In conclusion, Doji candlesticks favor a buyer or a seller, depending on the situation, which is at the same time, this is an indicator of indecision. It must be noted that when volatility is high, and prices jump in a short period, the presence of Doji candlesticks can not be excluded. So it isn’t easy to read them in such situations unless you know what you are doing.
