What Is a Doji Candlestick & How to Trade These Candlesticks?
Doji candlesticks come in several different shapes and sizes. The Doji candlestick by itself is a neutral pattern. They look like a plus sign or cross. Depending on the price action for the day it can be red (bearish) or green (bullish). They could be found near support levels, resistance levels, or consolidation areas. Watch our video on how to identify and trade doji candlesticks.
What Is a Doji Candlestick Pattern & How to Identify These Candlesticks?
Doji candlesticks are typically small real body candlesticks that look like a plus sign found on stock charts and are found near both support and resistance levels. The open and close is almost identical. They are typically black or a neutral color on a stock charts.
Candlesticks were invented by a Japanese rice trader named Homma, who is often known as the godfather of the candlestick chart. He saw correlation between supply and demand and emotion.
Thanks to him we now use candlestick charts in our trading. In fact, a candlestick chart can tell you a lot about the price action of a stock at a glance. Watch us teach candlesticks daily in our live trading room.
Shape of Doji Candlesticks
Every candlestick has four points of data that define its shape. Based on the candlestick’s shape, a trader can assume the behavior of the stock’s price. Doji candlesticks form when a stocks open and close are pretty much equal for the day.
It’s a sign of a reversal pattern when coupled with technical analysis. Doji trading provides information on it’s own and as a part of a bigger pattern. Dojis are found in many patterns.
Doji candlesticks are indecision candles. They show a tug of war between buyers and sellers. Price moves up and down during that trading day but close near or even at the opening price.
Hence a standoff occurs. Neither the bulls nor the bears were able to gain control that day. Which gives reason to believe a turning point is developing on that stock.
How You Read Doji Candlesticks?
Every candlestick has an opening, a close and a high and low of day. The filled part is called the real body. The lines coming out the top and bottom are tails or wicks.
The color of the candlestick tells you where the stock opened and closed. The wicks (top) or tails (bottom) are the high and low of the day.
As we stated earlier, they show the tug of war between buyers and sellers with no one winning the day. Price moves that day but no clear direction was given. Therefore it’s in indecision mode. That can be sign of reversal.
It could also be a sign of continuation. Both buyers and sellers are gaining momentum for the stock to continue in its current trend. Take our free online trading courses for more help trading.
Is a Doji Bullish or Bearish?
A doji can be both bullish and bearish depending if they are found in an uptrend or a downtrend. Typically doji’s make up two candlestick patterns called star patterns. Many of times they end up completing evening stars which are bearish and also morning stars with are bullish reversals.
Candlesticks are super important in the fact that you find support and resistance through their wicks and real bodies. You use technical analysis to determine where a trend in price is going.
Because it is an indecision candle you can add VWAP along with moving averages like the simple moving average to help paint a clearer picture. Candlesticks and technical analysis go hand in hand.
Therefore you can’t have one without the other. Technical analysis can help you in finding trends. Price moves in trends as well as history always repeating itself.
An indecision candle like doji candlesticks need the help of the technical indicators. Moreover emotions move markets. These indicators and candlesticks can help you see it coming.
We teach how to trade candlesticks on our live daily streams. Check out our trading service to learn more. Doji trading helps confirm a change in the trend of the pattern. Always get confirmation of a reversal so you don’t get stuck in a fake out, or a bad entry.
How to Trade Doji Candlesticks
- Knowing how to trade doji candlesticks is quite simple:
- Traders take a long position when price breaks above the high of the doji candlestick.
- They use a candlestick close below the low as a stop level.
- They take a short at the break of the low and use a candlestick close above high as a stop.
What Is a Bullish Doji Pattern?
A bullish doji pattern is typically a reversal pattern found at either the base of a downtrend or near support levels. In many instances, it will be preceded by a bearish candlestick then followed by a bullish one which ends up completing a morning star reversal pattern.
Doji Patterns Are Found Within Larger Patterns
Doji candlesticks make up larger patterns. Determining the meat of the real body of a doji depends on price, volatility and the previous candlesticks. That might not seem significant but it can be when you look at the candles around it.
Dojis can be apart of continuation patterns like bull and bear flags. The large candlestick makes up the flagpole. The doji candlesticks make up the flag. Check out our bullish vs bearish post to learn how to trade both markets.
The indecision candles show the buys and sellers are gearing up for the momentum of the continued trend. The trend could continue up as well as down.
Dojis are also apart of reversal patterns such as the head and shoulders pattern. When price breaks the neckline support it falls. Conversely price can head up if it’s an inverted head and shoulders pattern.
Whether you’re a day trader, swing trader or long term trader you need to be able to read what a stock chart tells you. Along with doji candlesticks, patterns and trends. Take our candlesticks patterns course.
A day trader is going to trade a stock multiple times in one day. The patterns, trends and candlesticks on an intraday chart will tell them something different than a swing trader.
A swing trader is holding a stock at least overnight. Usually you’re holding that stock 3-6 days put to a couple weeks. The daily chart shows the bigger patterns and trends so you know which way to trade.
It’s important that you take the time to study doji candlesticks and how to use them with technical analysis. A doctor studies their craft as well as a baker. They are always working on getting better – and you as a trader should too!
Stock trading should be no different. Take the time to learn how to use these tools to your advantage. You’ll become a lethal trader in doing so.