Doji candle patterns are one of the most prominent patterns in the world of financial markets. They’re known for their unconventional appearance, with no real body and longer upper and lower shadows, making them look like a cross or a plus sign.
Doji candles provide meaningful insights into possible movements in the market’s future price action, sometimes indicating consolidation while other times pointing to potential reversals. There are different types of doji candles, each offering different takeaways on current market situations. Traders who are interested in candlestick trading should spend the time to comprehensively familiarize themselves with these candles, as knowing them well can result in profitable trades, and confusing them with one another or other candles might lead to severe losses.
This blog is dedicated to doji candle stick pattern and everything you need to know about them, from bullish and bearish to dragonfly and gravestone doji candles and how you can trade successfully using these candles. If this sounds interesting to you, keep on reading!
What Is the Doji Candlestick Pattern?
Doji candlestick patterns are named after the Japanese word “Doji,” which translates into “the same thing.” They form when the open and close prices of the candle are at the same level or extremely close, giving doji candles that cross-like appearance.
Doji candlesticks are usually a sign of indecision in the market, as their rather long upper and lower shadows indicate how a power battle forms between the bulls and the bears, but doesn’t bring in any results and closes the candle at the same level it opened. This shows both buyers’ and sellers’ incapability to establish dominance and move the price in a certain direction.
While doji candles are known for their nonexistent body, there could be a minuscule difference between their open and close prices, which creates bullish doji candles and bearish doji candles.
Red and Green Doji Patterns
Doji candlesticks that have a small body can be bullish or bearish. If the open price is below the closing price, then you have a bullish (green) doji candlestick. Green doji candles show that after the candle opened, bulls and bears battled for dominance, forming high and low prices. However, bulls managed to push the price up just the tiniest bit, creating a bullish doji.
That said, if the open price is above the closing price, then you have a bearish (red) doji candlestick, indicating a slight decrease in the asset’s price before the candle closes.
Note: Bullish doji candles are shown with an orange color, while bearish doji candles are shown with a navy blue color in this blog.
While both bullish and bearish doji candles exist, they are not differently interpreted. They both show indecision most of the time. However, traders sometimes use the doji candlesticks to decide if there will be possible trend reversals or continuations as well.
There is also the possibility that the open and close prices of doji candles are at exactly the same level, making the candle neither bullish nor bearish.
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Doji Candle Meaning
Doji candlesticks can have different meanings depending on the market conditions when they are formed. When they are at the end of long uptrends or downtrends, they could signal potential trend reversals, either bearish or bullish.
However, they might also be a sign of market indecision. In such a case, they may indicate that the market is entering a consolidation period. During a consolidation period, assets tend to trade between a set of support and resistance lines, not breaking out.
Due to the various potential results signaled by doji candles, most traders can’t answer the question, “What does a doji candle mean,” considering the candle in isolation. Instead, they are encouraged to use other technical tools to interpret doji candles, such as the relative strength index (RSI), moving average convergence/divergence (MACD), or stop-loss levels.
Types of Doji Candlestick Patterns
Aside from the general red and green doji candlestick classification, which can also be said for every other candlestick pattern out there, there are 5 major types of doji candles you need to know of. These candles are categorized mostly based on the placement of the candle’s body, which is a flat line. Different types of doji candlesticks include neutral doji, gravestone doji, dragonfly doji, long-legged doji, and 4-price doji, all of which we will shortly explain.
1. Neutral Doji Candle
A neutral doji candlestick is the classic depiction of the pattern. It looks like a cross or a plus sign, with a flat-line body and longer upper and lower shadows. The body of a neutral doji candle is in the middle of the long line created by its upper and lower shadows.
As the name suggests, a neutral doji candlestick is just that, neutral. It doesn’t show dominance in either sellers or buyers. Rather, it’s a signal of indecisiveness.
When a neutral doji candle opens, there is a stand-off between the bulls and the bears, rallying the price and dragging it back down to form the candle’s high and low. However, at the end of the trading day, nobody wins, and the candle closes near its open price. As a result of this fruitless power battle, neutral doji show indecision.
2. Dragonfly Doji Candle
A dragonfly doji candle is a candle with a flat body near its top and a small or absent upper shadow. These features make the candle resemble a dragonfly, hence the name it’s called. In a dragonfly doji candle, the open, close, and high prices are extremely close to one another, resulting in the distinctive shape of the candle.
Although a dragonfly doji candle can be both red or green, it tends to be recognized as a bullish signal. As a result, the candle gains more power when it forms at the end of long downtrends.
When a dragonfly doji opens in a long downtrend, the bears pull the price further down to create the candle’s low. However, the bulls enter the scene soon enough, pushing the price back up and forming the candle’s high. After that, the price might drop a little bit to close the candle near the high, or it might just close the candle right then and there, leaving no space for an upper shadow.
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3. Gravestone Doji Candle
A gravestone doji candle is the opposite of a dragonfly doji candle. It looks like a gravestone, with its flat-line body sitting at the lower end of the candle, creating a super small or absent lower shadow.
Aside from looking like a gravestone, a gravestone doji candle also shares the overall vibe of one. It signals the potential death of a long bullish trend and a downward reversal as the bears gain more power.
A gravestone doji candlestick is a bearish signal that’s more reliable when it forms at the end of a long uptrend. In such a case, the candle opens at a lower price level, with bulls driving it up to create the candle’s high. Then, bears gain power and push the price back down, creating the candle’s low. From there on, the candle can close at the same level as its low or move the price up a little bit and create a minute lower shadow. What you should know for sure, however, is that the longer the gravestone doji’s upper shadow, the stronger of a price reversal signal it’s considered.
4. Long-Legged Doji Candle
A long-legged doji candle is kind of similar to a neutral doji, but it has longer legs (shadows). Unlike the neutral doji, however, the candle’s body should not necessarily be located in the exact midpoint of the long-legged doji.
A long-legged doji candle looks like a taller cross sign, showing indecision in the market. It might, however, suggest a slightly higher chance of the bears taking control of the market, but this chance is minuscule.
When a long-legged doji candle opens, the market price might increase or decrease, depending on the context in which the candle forms. Either way, the candle’s high and low form before the asset goes back to its open price and closes near that level. This process shows the struggle between the bears and the bulls to take control of the market, without any of them gaining any dominance. For that reason, a long-legged doji is a sign of indecision.
5. 4-Price Doji Candle
A 4-price doji candlestick is perhaps one of the most visually distinctive candles in financial charts. It is a flat line with no upper or lower shadows. So the candle opens, reaches its high and low, and closes, all at the same price level.
This single-line pattern is a strong signal for indecision, and traders usually don’t decide on their trading strategy based on this single candle alone. Instead, they wait for other candlestick patterns that follow after the 4-price doji to have a better understanding of the market sentiment and momentum.
Trading With Doji Candlesticks
Now that you’re more familiar with doji candles and their types, it’s time to get to the fun part: making money. In order to successfully trade with doji candles, you need to take specific steps. These steps will ensure that you’re well aware of the market conditions and that you’re making informed trading decisions. So, without further ado, let’s learn more about trading with doji candles.
1. Identify the Doji Candle
The first step in trading with doji candlesticks is, well, identifying the doji. This includes establishing that there’s a doji candle in the chart and determining what type of doji it is. To successfully go through with this step, you should invest enough time in getting to know doji candles and their different variations, which we went over above.
2. Read the Market Context
The next step would be to study the market context, including trends, market sentiment, or potential momentums. Doji candles are the most helpful if you know what context they are forming in. This is because they can create a wide variety of trading signals, from potential trend reversals or continuations to consolidation periods. As a result, you should spend some time learning more about the market context. Aside from recognizing trends and sentiments, a good practice for this purpose is to look for other candlestick patterns that form after the doji to better interpret it.
3. Apply Other Technical Tools
After learning more about the market context, you can use other analytical tools to confirm or deny your signal. These tools include a wide range of technical indicators, such as the relative strength index (RSI), the moving average convergence/divergence (MACD), and stochastic oscillators.
4. Choose a Trading Strategy
Your last step is to choose a trading strategy based on all your previous research. Use the signals you’ve received to see if the doji is a sign of trend reversal or continuation. Determine support and resistance levels based on the candle, and set your stop-loss levels accordingly. Like trading with any other tool, it’s important to define a robust risk management strategy when trading doji.
Doji Candlestick Pattern Pros and Cons
Like any other candlestick patterns, doji have their strong suits and limitations. Perhaps the most prominent advantage of trading with doji candles is how easily they can be recognized. Below, you’ll be able to see a more detailed list of doji candles’ pros:
- Ease of identification
- Strong trend reversal signal at trend highs
- Indication of market uncertainty
- Pinpointing trend highs
- Extremely effective in forex and stock markets
- Compatibility with various timeframes, especially those longer than an hour
On the other hand, a well-known limitation of these candlesticks is that they don’t provide a ton of information when considered in isolation. Other doji candle disadvantages include:
- A higher rate of false signals
- Lack of reliability when used alone
- Time-consuming confirmation process
- Difficulty memorizing various doji candles
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Conclusion
Doji candles are one of the most visually prominent candlestick patterns in price charts. They generally look like cross or plus signs, with the candle’s body being as thin as a flat line and the shadows extending out from the sides.
Doji is a Japanese word that means “the same thing,” which explains the flat-line body of the candle. During the formation of a doji, open and close prices are either extremely close to one another or at the same level, hence the name.
There are both green and red doji candles, both signaling the same thing. Doji candle types include dragonfly, gravestone, neutral, long-legged, and 4-price. Depending on the type of doji candle you’re handling, they could be a sign of uncertainty, trend reversals, or continuations.
If you’re looking to further familiarize yourself with doji candles and how you can get hands-on experience trading them, you should check our demo accounts at ITBFX. They’ll enable you to test out different strategies and get comfortable trading, all while using virtual funds. Moreover, by visiting ITBFX Instagram Channel and website, you can get a ton of helpful tips and tricks to boost your trading journey.
What are doji candles?
Doji is a type of candlestick that resembles a cross or plus sign. It has a flat line as its body, showing the close proximity of the candle’s open and close prices and two longer shadows extending from the sides of the body.
What is the meaning of doji candles?
Doji candles can have various meanings. Depending on the candle type (neutral, gravestone, dragonfly, long-legged, 4-piece doji), these candles can indicate trend reversals or continuation, as well as indecision and uncertainty in the market.
Are doji candles reliable?
While doji candles can produce strong signals, traders are recommended to use them in addition to other technical tools for maximum accuracy.
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