Doji 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.
Table of Contents
What Are Doji 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 are almost identical. They are typically black or a neutral color on a stock chart.
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.
Basics
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.
Candlesticks are super important in the fact that you find support and resistance through their wicks and real bodies. An indecision candle like doji candlesticks need the help of the technical indicators.
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.
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.
How to Trade Doji Candlesticks
- 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.
Frequently Asked Questions
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.
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.
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