Japanese candlestick pattern: DOJI

What is a doji?

Doji is a type of candle in which the opening and close price are same. This is one of the most important reversal patterns in Japanese candlestick chart.

How to identify a doji?

See the above picture, the second arrow shows a perfect doji. The opening and close price are same.

Even when the opening and closing prices are a few pips apart, it is considered a doji candle. See the first arrow in the picture

Why doji candlestick is important?

As warning signal:

Doji candle act as a warning sign for the probable change in direction of price. It signifies that sellers and buyers have equal control over the price. That is why the closing and selling prices happened to be nearby.

As reversal pattern:

When a doji candlestick appears after a good bullish move, chances of price reversal are really high. See the chart, the doji appeared at after a bullish move. This is warning that price may change its direction. The next is a bearish candle which confirms the doji. See how the price moved down after that. Doji candle is one of the most important reversal patterns in candlestick chart.

As support or resistance:

In certain cases the doji candle will form a support or resistance to the price. The arrow shown in the chart shows a doji. The red line indicates the resistance line created by the doji.  After that doji candle formed price tried to break that point several times but failed.

Types of doji:

 Let’s take a look at different type of doji candle in chart

Long legged doji:

The picture shows a long legged doji. As the name indicates that candle will have a long upper and lower shadow.

Gravestone doji:

If opening and closing price are near the close of the candle, it is called a gravestone doji. This candle pattern is a bearish reversal pattern when price is moving up. The arrow in the chart shows a gravestone doji. See how price fell after that.

Rickshawman doji:

When the opening and closing price are near centre of candle it is called rickshaw man doji. See the chart.

Dragonfly doji:

This is just opposite of gravestone doji. In this candle pattern the opening and closing price will be at/ near by the high of candle. This is a bullish reversal candle. See the chart, the arrow shows a dragonfly doji candle.

How to trade a Doji candle?

The first part in trading fore with candlestick is to identify the pattern, the second part is to know how to trade that pattern.

•  All doji candles cannot be traded.    Every doji will not give the accurate direction of price. See the examples of failed doji.
  
• Trade doji only after confirmation:   When doji appears on top, wait for the next candle to close. If it is a bearish candle and the price go below the low of doji, and then enter in to a trade. Vice-verse for doji at bottom.

Remember these:

• Doji at top have bigger effect than at bottom. So when you see a doji candle at bottom always wait for extra confirmation.
• Intra day chart of small time frame will have more number of doji’s. They are not significant.
• Try to trade doji candle in a higher time frame for maximum results.
• The place which doji appears gives more importance to doji. If a doji pattern appears at a major support or resistance, chances of change in price direction are high.

Whether to go for confirmation or not:

If your trading style is conservative, it is advisable to wait till confirmation before entering to a trade. But the problem in doing so is that, if the confirmation candle is too long, you may lose a major part of the journey. The next candle that you enter may be a little late. This can affect your profit. But the brighter side is there will be less number of wrong trades.

If you are aggressive trader, you may enter without waiting for confirmation but with calculated risk. Chances of wrong trades are very high in this method.

It all depends on your style of trading and risk appetite.