Doji candlesticks come in several different shapes and sizes. The Doji candlestick by itself is a neutral pattern. Dojis look like a plus sign or cross. Depending on the day’s price action, it can be red (bearish) or green (bullish). They could be found near support levels, resistance levels, or consolidation areas.
What Does a Doji Candlestick Indicate?
A doji candlestick is an indecision candle. They show a tug-of-war between buyers and sellers. The 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. This gives reason to believe a turning point is developing on that stock.
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. For example, Doji candlesticks form when stocks open and close are equal for the day.
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 a part 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 buyers and sellers are gearing up for the momentum of the continued trend. The trend could continue up as well as down.
Dojis are also a part of reversal patterns, such as the head and shoulders pattern. When the price breaks, the neckline support falls. Conversely, the price can increase if it’s an inverted head and shoulders pattern.
How to Trade Doji Candlesticks
- Traders take a long position when the price breaks above the high of the doji candlestick
- They use a candlestick close below the low as a stop level
- Traders take a shot at the break of the low and use a candlestick close above high as a stop
The picture of $CAT shows doji candlesticks to the upside and downside
Doji Candlesticks in Uptrends and Downtrends
A doji candlestick can be found in both uptrends and downtrends. Be aware of a potential reversal when you see these candles form after a long trend in either direction.
In the picture above, take note of the first doji candlestick. You’ll see a prolonged downtrend on CAT on the daily chart. Then, a doji formed near the base of a previous support level, creating a double bottom pattern.
The green doji on the chart also looks like a spinning top candle. Spinning tops and dojis can look similar, but their real bodies are bigger than a doji candlestick. It’s important to note that they often tell a similar story, that the trend is about to reverse.
The first doji near support had separation, thus creating a star pattern. It ended up being a morning star reversal. The second doji candlestick at the top of the uptrend created a bearish harami pattern, a bearish reversal.
Frequently Asked Questions
A doji can be bullish and bearish, depending on whether they are in an uptrend or a downtrend. Typically, doji's make up two candlestick patterns called star patterns. They often finish evening stars, which are bearish, and morning stars with 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, followed by a bullish one, which completes a morning star reversal pattern.