Trading using the doji candlestick can provide powerful insights into what may be happening with price behavior such as signaling indecision among traders (between buyers and sellers) as well as signaling that the current direction of a trend may be nearing its end and possibly about to reverse its course.
The Doji Candle
A doji candle is a Japanese Candlestick where the closing price ends up at the same price (or close to the same price) to that of the opening price for a particular trading session resulting in no (or little) change in price.
For example, a doji candle may exhibit the following trading price behavior for a particular trading session: a stock may open at $23.50, then goes down to $22.87, then trades higher hitting $24.17, and then falls back down and closes at $23.50 (back at the opening price).
Because the opening and closing prices are the same (or close enough to being the same) for a particular trading session, a doji candle does not contain a “real body” that is often found in many other types of Japanese Candlesticks. A real body is formed when the opening and closing prices for a particular trading session are considerably far enough away from each other.
For example, a real body can be formed with an opening price of $32.50 and a closing price of $33.87 representing a bullish real body. Conversely, a real body may also have a bearish real body with an opening price of $32.50 and a closing price of $31.24. In either case, the opening and closing prices are considerably far enough away from each other which produces the real body.
As you can see, the doji candlestick can still form a trading range of both high and low prices, but by the end of the trading session the opening and closing prices are essentially equal to each other.
Doji’s represent indecision among traders (between buyers and sellers) in the market place where neither of them are able to gain strong enough control to significantly close prices as to being either considerably above or below from the opening price of the trading session.
Doji Candles – Types Of
One of the most familiar types of a doji candlestick has the look of a “plus sign” with “shadows” (or “wicks”) extending outward from both sides of the doji’s nonexistent “real body” – hence giving the look of a plus sign.
In addition, doji candlesticks can also be of other unique types where the lengths of the shadows (or wicks) can vary in size or are biased more to one side or the other side such as with the following:
- Gravestone Doji (long upper shadow, no lower shadow – looks like an upside down letter “T”)
- Dragonfly Doji (long lower shadow, no upper shadow – looks like the letter “T”)
- Long-Legged Doji (extra long upper and lower shadows roughly equal in length)
Doji Candles – A Powerful Signal For Reversals Of Trends
Doji candles are known for their ability to give strong warning signals that a trend may be nearing its end and possibly about to reverse in direction.
The doji is most powerful in giving its strong warning signal when it occurs during a long running uptrend that forms itself right after a candlestick that has a long bullish real-body (the closing price is considerably above the opening price for a given trading session).
When this happens, the doji candlestick can signal that exhaustion (running out of buying power) among the bulls is starting to set in and indecision among traders begins. This is where the strong warning signal presents itself that the current direction of a trend may possibly be ready to reverse itself. To provide further guidance about the possibility of a trend reversing itself, the candles that follow after the doji candlestick should be bearish in nature.
In this case, such a warning signal from the doji candlestick can potentially offer great trading opportunities to profit from trading the downside of the market by either shorting stocks (or other types of financial instruments) or even buying put options (buying put options will gain in value when the price of the underlying financial instrument falls in value).
According to Japanese Candlestick leading authority expert Steve Nison, – “doji’s are better predictors of calling market tops than they are for calling bottoms.”
Tip – Doji candlesticks can present themselves all over the place on charts when the chart time frames are set to very short durations like 1, 2 & 3 minutes. As a result, doji’s start to lose their powerful predictive value of what they are best known for – signaling indecision and trend reversing indicators. According to Nison – “candlestick charting should be viewed on a time frame that is at least 30 minutes or greater“ in order to have a stronger foundation for the development of legitimate doji candlesticks.
