What is the Doji Candlestick Pattern and How Do You Trade with It? IG International

We recommend backtesting all your trading ideas – including candlestick patterns. A doji is a pattern of indecision but can be inclined to bullishness and bearishness. doji candlestick pattern A longer lower tail means stronger bulls and a longer upper tail means stronger bears. Dragonfly Doji has a long lower shadow or leg but doesn’t have an upper shadow.

Trend lines can help traders and investors see the potential for trend reversals and confirm the validity of the Four Price Doji. For example, if the Four Price Doji appears after a downtrend, a break above a downward trendline could indicate a potential bullish reversal. However, in short period candlestick forex pairs, specifically, when the American market closes, you can find a lot of 4-price doji patterns. Instead, it simply signals that the market is entering a period of indecision.

The Double Doji strategy looks to take advantage of the strong directional move that unfolds after the period of indecision. It’s common to see the Four-Price Doji in markets where trading volume and liquidity is extremely low. A Four-Price Doji occurs when the open, close, high and low prices are the same. A Dragonfly Doji occurs when the opening and closing price is at the same level but, with a long lower wick.

The main difference between the dragonfly and the spinning top is that there is little/no upper shadow in the former. A dragonfly indicates a stronger bullish signal than a spinning top, as it suggests a potential trend reversal. Traders should remember that a spinning top may provide both bearish and bullish signals. A dragonfly doji with high volume is generally more reliable than one which forms on relatively low volume. Ideally, the confirmation candle also has a strong price move and strong volume.

  • Some of these patterns are the evening star, morning star, doji, hammer, engulfing, and piercing lines among others.
  • A single technical indicator can never be reliable enough to form a solid trading strategy.
  • This means that the price did not change at all during the period of a candlestick.

Every investment and trading move involves risk, and readers should conduct their own research when making a decision. In conclusion, here are the key points of trading the Doji candle pattern. Like all facets of technical analysis, Dojis have a unique collection of pros and cons.

Doji Candle trading FAQs

Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts. The first doji outlined on Chart 1 in the previous section was a high-low doji, where prices made the highs for the day first, and the lows for the day second. Spinning tops are quite similar to doji, but their bodies are larger, where the open and close are relatively close. A candle’s body generally can represent up to 5% of the size of the entire candle’s range to be classified as a doji. In Japanese, “doji” (どうじ/ 同事) means “the same thing,” a reference to the rarity of having the open and close price for a security be exactly the same. Depending on where the open/close line falls, a doji can be described as a gravestone, long-legged, or dragonfly, as shown below.

  • Furthermore, it is very unlikely to see the perfect Doji in the forex market.
  • Two trading strategies where they excel are the reversal and breakout methodologies.
  • When buying and selling are almost the same, this pattern occurs.
  • This article represents the opinion of the Companies operating under the FXOpen brand only.

This suggests that buyers and sellers both tried their hardest to take control of the price action. However, they were evenly matched, with no clear winner in the end. When this formation happens, the closing price is under the mid-point. As such, it’s considered a bearish signal, especially when it happens near resistance levels.

Types of Doji Candlestick Pattern

We want to clarify that IG International does not have an official Line account at this time. We have not established any official presence on Line messaging platform. Therefore, any accounts claiming to represent IG International on Line are unauthorized and should be considered as fake. 71% of retail client accounts lose money when trading CFDs, with this investment provider. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money. When looked at in isolation, a Doji candlestick pattern indicates that neither the buyers nor sellers are gaining – it’s a sign of indecision.

Trade the breakout

More patient traders can wait until the price tests the resistance trendline to see where the price will go next. On the other hand, its occurrence in a downtrend hints at a potential upside retracement. The long-legged Doji has longer wicks, suggesting that buyers and sellers have tried to take control of the price action aggressively at some point during the candle’s timeframe. It is valid to note that the Doji pattern does not necessarily mean that there will always be a trend reversal. The size of the dragonfly coupled with the size of the confirmation candle can sometimes mean the entry point for a trade is a long way from the stop loss location.

Gravestone Doji

Based on this shape, analysts are able to make assumptions about price behavior. The filled or hollow bar created by the candlestick pattern is called the body. A stock that closes higher than its opening will have a hollow candlestick. If the stock closes lower, the body will have a filled candlestick. One of the most important candlestick formations is called the doji.

Gravestone doji has a long upper shadow, but it doesn’t have a lower shadow. However, it is just more likely to be a bullish candle not in general. In general, long-legged doji means that both sides, bears, and bulls are fighting to defeat the other side. And, in this situation, both upward and downward movement is possible.

A doji could be formed by prices moving lower first and then higher second. The size of the doji’s tail or wick coupled with the size of the confirmation candle can sometimes mean the entry point for a trade is a long way from the stop-loss location. A spinning top also signals weakness in the current trend, but not necessarily a reversal. If either a doji or spinning top is spotted, look to other indicators such as Bollinger Bands® to determine the context to decide if they are indicative of trend neutrality or reversal. In this example, the gravestone doji could predict a further breakdown from the current levels to close the gap near the 50- or 200-day moving averages at $4.16 and $4.08, respectively.

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