Japanese Candlesticks - Doji CandlesAs traders, if we want to improve our technical analysis knowledge to better develop our price action skills, we owe it to ourselves to grasp candlestick patterns, in this case the Doji candlestick pattern.
This post will go into further detail about this unique candlestick group and will also explain the psychology behind these patterns and how they can affect future price movements in the market.
Before we go into further detail about doji candles, there are times this post will mention the words: 'OPEN PRICE, 'CLOSE PRICE, 'HIGH PRICE, 'LOW PRICE, 'UPPER WICK, 'LOWER WICK, and 'BODY.' So what are these?
OPEN PRICE: Open means a candlestick's first price when it started.
CLOSE PRICE: Close means a candlestick's last price when it ended.
HIGH PRICE: High means how high the price went during that candlestick.
LOW PRICE: Low means how low the price went during that candlestick.
UPPER WICK: An upper wick forms when the high price of the candlestick is higher than the close price (bull candle) or open price (bear candle) of the period.
LOWER WICK: A lower wick forms when the low of the candlestick is lower than the close price (bear candle) or open price (bull candle) of the period.
Body: The visual difference between the candlestick's open and close prices.
What is a Doji candlestick?
The Doji Japanese candlestick pattern is a class of single-bar indecision patterns whose open and close prices are either identical or close to identical and therefore either do not have bodies or have very small bodies. A doji candlestick pattern generally suggests indecision or uncertainty in the markets. The reason for this is because of the psychological meaning behind a doji candle. As previously mentioned, all doji candles' open and close prices are either identical or close to identical, meaning that during the time of the candle's formation, buyers (bulls) and sellers (bears) were both at a complete standoff and neither one came out on top.
There are different types of doji patterns depending on where the open and close prices are, and these types are known as: doji star, gravestone doji, dragonfly doji, long-legged doji, and four-price doji.
Technical traders use the 'doji' term to refer to all of the above patterns but specifically call out a doji by its proper name when they want to be more specific, e.g., a dragonfly doji.
Doji Star
The doji star (also known as 'standard doji' or 'neutral doji') is a pattern that is composed of an upper and lower wick on either side of the opening and closing price that are approximately the same length.
The doji star’s main features are:
Identical or close to identical opening and closing prices.
The upper wick and lower wick are approximately the same length.
Overall, it has a cross shape.
It indicates indecision: the market hesitates between two directions.
When a doji star appears at the top of a bullish swing or at the bottom of a bearish swing, this is seen as a sign that there may be a possible change in the trend. The reason for this is due to the neutral formation of the candle and what it means psychologically: this candle pattern tells us that buyers and sellers were completely equal; it is not possible at this moment to judge which side of the market has the upper hand, so if a doji star appears near the top or bottom of a trend swing, then it is possible that there may be hesitation or uncertainty to continue the trend.
Gravestone Doji
The gravestone doji pattern is formed by a candle that has only the upper wick. This indicates that the price tried to move higher but failed to do so and closed at a price identical to or close to identical to both the open and low prices.
The gravestone doji’s main features are:
A long upper wick.
No lower wick
Open and close prices are identical or close to identical to the low price.
Overall, the pattern has an inverted 'T' shape.
This pattern is most significant at the top of a bullish swing.
It indicates indecision; this has a more bearish bias because of the upside rejection of the high price from the sellers.
The psychology behind the gravestone doji usually indicates that the buyers might be losing power because they can no longer drive the price up and the sellers might be in control. When a gravestone doji pattern appears, especially at the top of a bullish swing, this is seen as a positive sign that there may be a possible change in the trend.
Dragonfly Doji
The dragonfly doji pattern is formed by a candle that has only the lower wick. This indicates that the price tried to move lower but failed to do so and closed at a price identical to or close to identical to both the open and high prices.
The dragonfly doji’s main features are:
A long lower wick.
No upper wick.
Open and close prices are identical or close to identical to the high price.
Overall, the pattern has a 'T' shape.
This pattern is most significant at the bottom of a bearish swing.
It indicates indecision; this has a more bullish bias because of the downside rejection of the low price from the buyers.
The psychology behind the dragonfly doji usually indicates that the sellers might be losing power because they can no longer drive the price down, and the buyers might be in control. When a dragonfly doji pattern appears, especially at the bottom of a bearish swing, this is seen as a positive sign that there may be a possible change in the trend.
Long-legged Doji
The long-legged doji pattern is just like the doji star, but with a longer upper and lower wick on either side of the opening and closing price. This pattern suggests not only market uncertainty but also more market volatility due to the longer wicks on either side.
The long-legged doji's main features are:
Identical or close to identical to the open and close prices.
The long upper wick and the long lower wick are approximately the same length.
Overall, it has a cross shape.
It indicates indecision and higher volatility; the market hesitates between two directions.
Four-Price Doji
The four-price doji pattern (also called 'doji of four prices') is the rarest doji pattern type; it is extremely rare on the chart, especially on the higher time frame charts. It represents a straight horizontal line (only the body, without any upper and lower wicks). The pattern is formed when all four prices are the same: open, high, low, and close.
The four-price doji's main features are:
Completely flat horizontal body with no upper or lower wick.
Overall, it has a 'dash' shape.
Open, high, low, and close prices are all identical.
As rare as this doji pattern is, it does form from time to time. This happens either on very low-liquid assets or when volumes severely drop on the market, for example, during holidays or near the start or close of a trading session.
Be careful with short time frames!
Doji candles appear far too often in shorter timeframes; traders on short-term timeframes do not generally take them as serious signals for predicting future price movements. Doji candles on shorter time frames are not as psychologically impactful as doji candles that form on longer-term charts. A big reason for this is due to the fact that it is a lot easier for a doji candle to develop in a shorter time frame than in a longer one. For example, it is far easier for a one-minute candle to have an identical or close to identical open and close price than it is for a daily candle to have an identical or close to identical open and close price. Additionally, short-term timeframes feature a lot of price noise, which can be confusing for traders.
EURUSD 1 Minute Chart
As you can see in the image above, doji candles appear too many times in the shorter time frames to be effective.
Advantages and Disadvantages
With all technical analysis methods in the financial markets, there are advantages and disadvantages to them, and doji candle patterns are no different. The advantages and disadvantages of doji candle patterns are:
Technical traders use Japanese candlestick patterns to help understand and predict future price movements. Doji candles can be very effective in doing this, and traders should pay attention to them when they form on their charts as they can provide potential trading opportunities. However, due to their limitations, traders should use additional technical analysis methods alongside any doji pattern to predict future price movements. Doji candles are indecision candles and therefore do not guarantee trend reversals, but make sure you are cautious of them, observe them, and, most importantly, learn from them!
Trade safely and responsibly.
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