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How to Effectively Use the Doji Candlestick Formation

  • 7 mins read

If there’s one candlestick pattern I find extremely useful and accurate is the Doji candlestick – a very strange candlestick formation that signals indecision between buyers and sellers in a certain market. Luckily, identifying a Doji in a candlestick chart is not as hard as identifying other forex chart patterns and learning more advanced forex trading strategies. In fact, it is quite easy to find a Doji on a chart and using it could help you find many trading opportunities, particularly for intraday trading. 

So, let’s take a look at what exactly is the Doji candlestick, what are the most common Doji types, and how to trade any market using the Doji pattern?

Key Points to Take Away

  • A Doji is a common candlestick pattern that indicates indecision between market participants and often suggests a potential signal for a trend reversal. 
  • There are five popular types of Doji candlestick formation in technical analysis. Those are standard (star), gravestone, dragonfly, long-legged, and 4-priced. 
  • The best technical analysis indicators and patterns to get a Doji affirmation are RSI, Tri-Star pattern (a series of Dojis), and moving averages.  

What is the Doji Candlestick Formation?

The name Doji comes from Japanese and means mistake or error.  However, if we think about it means, it would be fair to say that it is not a correct way to describe the formation, simply because it is not a mistake. Occasionally, the markets experience times of indecision, meaning the number of buyers and sellers is somehow equal and the market has found an equilibrium. Doji is able to represent this market condition on a candlestick trading chart. 

In a simple explanation, a Doji is a candlestick formation in which the asset has open and close prices that are equal. It, therefore, usually indicates a possible reversal pattern of the prior trend although in some cases, it can also be interpreted as a continuation of the trend. 

In terms of how it looks, the Doji candle has a formation of a plus or a star and has no body and no upper and lower wicks. 

doji candlestick formation

The Most Common Types of a Doji Candlestick

The formation of Doji candlesticks depends on where the opening price and closing price occur, which creates different types of candlestick shapes and patterns. But regardless of the shape being created, the fact that the open and close prices are equal indicates that market sentiment is indecisive, and normally suggests a reversal or price consolidation.

Keeping that in mind, below you can find 5 of the most commonly found types of Doji patterns.

Standard (also known as regular or star) Doji Pattern

On its own, a Doji star candlestick does not mean much since the length of the candle is fairly short. Nonetheless, it typically indicates the end of a trend and a potential reversal.  

Long-Legged Doji Pattern

The long-legged Doji is a very similar version of the standard Doji but with one exception – it has a greater length and thus, it reflects a higher level of indecision in the market. Typically, the long-legged Doji formation is more dramatic than the star pattern and signals that reversal may occur.

Gravestone Doji Pattern

The gravestone Doji pattern is basically a candlestick that displays a scenario where the price closes at a low level of the candlestick and during the time period of the candlestick, investors try to unsuccessfully push prices higher.  Consequently, this Doji price pattern signals a bearish market sentiment.

Dragonfly Doji Pattern

The dragonfly has the same pattern as the Gravestone but in the opposite direction. It shows the failure of sellers to continue the bearish trend, hence, it indicates that the market is expected to rise. 

4-Price Doji Pattern

The four-price Doji candlestick is an unusual neutral Doji pattern that has equal values for the opening, high, low, and closing prices. This candlestick looks like a horizontal line as the opening and closing price is ultimately equal. Typically, this pattern occurs in illiquid assets and has no significant meaning for the next price movement.

types of dojis, forex charts

How to Trade a Doji Candlestick Formation?

At this point, you most likely see the logic behind the Doji candlestick. When you notice a Doji pattern in a chart, it is a strong signal of market indecision and means that the price action is expected to change or, at least, consolidate. 

Still, the market has its own rules and nothing is guaranteed. Even if you notice a Doji, it does not necessarily mean that the market trend is expected to change. To increase the efficiency of Doji,, it would be best to integrate it with other technical analysis tools or popular chart patterns you are already familiar with. So, let’s back up and explore some Doji trading strategies you can use. 

3 Top Doji Trading Strategies

Doji Candlestick Pattern and the Relative Strength Index (RSI)

One method to get confirmation of a market reversal when you see a Doji formation is to use the Relative Strength Index (RSI) indicator. Why is that? Because the RSI is the ideal momentum indicator to identify overbought or oversold areas. For example, as you can see in Apple’s daily chart, a long-legged Doji candlestick indicates a reversal of an uptrend which can be confirmed with the RSI touching the 70 level.

A series of Dojis

Well, one single Doji is a good thing but what about several Dojis coming one after the other? This is known as a Tri-Star pattern, which is essentially three consecutive candlesticks of Doji. In this case, the market is looking for a direction but basically cannot find the next direction due to a temporary equilibrium. 

If this happens – you should observe the price action before the formation of the Doji. If the market was trending, then a series of Doji clearly signal a market reversal. Otherwise, if the market was ranging, then the next candle after the Doji series (or at least two or three candles, to be on the safe side) will indicate the next direction. 

Combine Doji Candlestick Patterns with Moving Averages (MA)

Lastly, another useful technical analysis indicator is the moving average (MA). In essence, a moving average is an indicator that calculates the prices of an asset over a specified time frame and helps traders to identify the direction of a trend. 

Here, the combination of a Doji candlestick pattern and moving averages can assist in finding a reversal but also to determine whether the Doji was indeed a ‘mistake’ and the continuation trend is expected to continue. 

In the chart below, for example, we can see a Doji candlestick at the end of a small downtrend. In this case, we used MA 14 and MA 21 – once they both crossed up, then there’s a strong signal for a reversal.

On the other hand, as we mentioned earlier the use of moving averages can also help in identifying a false reversal. In the Apple stock chart below, we can notice two Dojis but there’s no cross of the price below the MA14 and the MA21. Therefore, this indicates the continuation of the trend, and the appearance of Dojis should be ignored. 

Conclusion

To sum up, the Doji candlestick is not a technical analysis pattern that you need to learn in order to identify and use in trading. If you spend several hours in front of a trading chart, you’ll shortly notice a Doji candlestick where there’s indecision and the next price movement is not yet clear. 

Personally, it is one of my favorite candlesticks to trade. It does not mean that I’ve never got thrown away and “whipsawed” when using a Doji candlestick. Nonetheless, it is a simple and effective pattern that helps you to identify indecision in the market, and better understand the market sentiment. Additionally, the use of the Doji pattern can be done in any financial instrument in any market including foreign currency pairs, cryptos (very useful), stocks, etc.

FAQs

Where did the Doji candlestick get its name?

It is assumed that candlestick charts have been developed by Munehisa Homma who was a Japanese Rice trader. The name “Doji” is derived from Japanese and means “mistake.”

What does a long ledge Doji candlestick mean?

A long-legged Doji candlestick represents a high level of indecision among market participants and usually suggests a reversal in the current market trend. 

What does the Doji candlestick indicate?

Generally, a Doji candlestick represents a state of price equality and indecision between the buyers and the sellers. Therefore, in the vast majority of cases where a Doji occurs, a potential reversal in price might occur. 

What happens after a Doji candlestick?

In most cases, the price is expected to change direction after a Doji candlestick formation. However, the markets have their own dynamics so you shouldn’t automatically take a trading position based on a Doji pattern. To confirm the validity of a market reversal, it would be best to use other technical analysis tools such as RSI, moving averages, and a series of Dojis. 

Is a Doji candle bullish or bearish?

Principally, Doji represents indecision and has no bullish or bearish bias. What it basically means is that once the Doji candlestick formed, it all depends on the prior trend – if the market was rising and a Doji appeared then we can say that a bearish reversal might occur. On the other hand, when the price declines and a Doji candle is formed, then bullish traders will see it as a bullish reversal sign.