What is a Doji Candlestick Pattern?

Doji Candlestick Pattern It is one of the technical tools used to analyze stock price charts. Every candle formed on a chart has its own unique characteristics. Here in this article we will discuss the Doji candlestick pattern in detail and explain how to use it to predict market movements.

What is it? doji candlestick pattern?

A doji is a candlestick pattern where the opening and closing prices of the candle are almost the same. Typically, a doji formation signals indecision or signals a security trend reversal.

This pattern indicates that neither bulls nor bears are gaining control, creating uncertainty in the security. Depending on the formation of a pattern within a price trend, the Doji can signal a potential reversal or continuation of the trend.

It looks like a candlestick with almost identical upper and lower wicks and a small or no body. The word Doji is derived from the Japanese word meaning “equal,” meaning that the opening and closing prices of a security are the same or the same.

Types of Doji Candlestick Patterns

Depending on its length, different types of security opening and closing dojis are formed. Here are the five main pattern types that we will discuss in detail.

• Doji with long legs
• dragon fly doji
• tombstone doji
• Standard Doji/Old Doji
• 4 price doji

Doji with long legs

It is a type of Doji candlestick pattern that indicates indecision about the direction of the security. Very small or identical bodies with long shadows on either side, indicating that multiple buyers are trying to push the price up. The market rejects this.

At the same time, many sellers try to lower prices but frankly fail. This reluctance between buyers and sellers causes prices to close at the same opening or small body formation. This indicates indecision about direction and the price may reverse in either an upward or downward direction.

How to trade long leg doji?

entry:- Since the pattern indicates indecision, it is recommended to enter above or below the long leg doji formed by long and short positions respectively.

A long-legged Doji formed at the bottom of a downtrend indicates a possible price reversal toward an uptrend. If the price of a security closes above the pattern high, traders can enter a long position.

When the pattern forms at the top of an uptrend, it indicates a price reversal towards a downtrend. Here, a short position is placed when the price of the security closes below the long-leg doji formed.

Stop Loss:- Stop loss for a position is simple. For a long position, the stop loss will be the lowest value of the pattern formed.

For sell positions, the stop loss occurs at the high point of the long leg doji pattern formed.

Profit Target:- Since the pattern does not define a profit target, it is better to place the target based on the risk-reward ratio or the next support/resistance level.

dragonfly doji

This is a type of doji candlestick pattern that forms when the market is trending in a specific direction, which can lead to a price reversal after the formation of the Dragonfly Doji.

The Bullish Dragonfly Doji is shaped like a “T” shape. It has a long wick in the lower half, a very small (or body) and a small upper wick.

In this pattern, the long downward shadow shows that aggressive selling by sellers is absorbed by buyers, causing the price to rise again.

How to trade Dragonfly Doji?

entry:- A pattern formation indicates a potential reversal of the trend.

When a Dragonfly Doji forms at the bottom of a downtrend, it indicates that the price is reversing in an upward direction.

You can enter a safe and confirmed long position when the price of the security is higher than the closing price of the Dragonfly Doji formed.

Likewise, when a Dragonfly Doji forms at the top of an uptrend, it indicates that the price is reversing in a downside direction. Here, traders can enter into a safe and confirmed sell position when the price of the security is below the closing price of the Dragonfly Doji pattern formed.

Stop Loss:- The stop loss for long positions is the high point of the Dragonfly Doji candle.

Profit Target:- Since the pattern does not define a profit target, it is recommended to place the target based on the risk-reward ratio or the next support/resistance level relevant to the trade.

tombstone doji

It is shaped like a Doji candlestick with a large wick at the top, a small body behind it, and a small wick below it. The shape is very similar to an “inverted T”. In this pattern, the price rises due to buying pressure, but the market rejects the buyers, causing the price to fall and close near the open.

The Tombstone Candlestick Doji pattern continues the bearish rally by ending the previous uptrend, which is opposite to the Dragonfly Doji pattern that was formed.

How to trade Tombstone Doji?

entry:- A pattern formed at the top of an uptrend indicates a price reversal towards a downtrend. A short position can be initiated when the next candle closes below the Gravestone doji pattern.

Stop Loss:- In the case of the Tombstone Doji pattern, the stop loss is simple, and the highest point of the formed pattern can be set as the stop loss.

Profit Target:- Since the pattern does not define a profit target, it is recommended to place the target based on the risk reward ratio or the next support level associated with the trade.

Standard Doji/Doji Star

A standard doji is a type of candlestick pattern where the open and close prices are very close to each other. Wicks formed from standard doji can be of any length, but are usually short.

Pattern formation is a neutral indicator and shows that there is indecision in the market. Neither bulls nor bears can gain momentum.

However, the standard doji candlestick pattern can sometimes indicate a market reversal. For example, if a standard Doji appears in a strong uptrend, it may be a sign that the trend is about to end and downward momentum is expected.

The standard doji pattern can be used in conjunction with other technology tools for security access verification.

4 price doji

A 4-way doji is a type of candlestick pattern in which the opening, high, low, and closing prices of the candle are one.

This is a very rare pattern formation that appears as a single horizontal line on the price chart in very low volatility markets, indicating the presence of indecision in the security.

Pattern formation does not have a clear view of the strength or weakness that exists in a security.

Therefore, it is not advisable to rely only on the four price doji patterns. Therefore, for a better perspective, it can be combined with other technical indicators to measure the indecisiveness that exists in security.

conclusion

As explained above, Doji candlestick patterns are an important consideration in analyzing security price charts to make informed decisions about price movements.

It is always preferable to use Doji candlestick patterns along with other technical tools to find better entry and exit opportunities in security. You should always understand that better risk management with a good risk-reward ratio can help traders earn more profits in the long run.

Written by Deepak M

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